The Overnight RateThis week puts that to a test. The Fed is about to raise interest rates into a jump in oil prices that traces back to attacks on shipping in the Strait of Hormuz.
- The hike on Wednesday is at 80% on Polymarket, up from 61 the morning before Friday’s inflation report (Polymarket). Friday’s CPI came in right on consensus at 3.4%, and the odds moved anyway. Two or more hikes this year is up to 44%, from 35 on Friday morning (Polymarket).
- A vessel was hit by an unknown projectile in the Strait of Hormuz on Sunday, caught fire, and had its crew evacuated, according to UKMTO, the British maritime security service (Middle East Eye). Days earlier, a drone attack shut Saudi Arabia’s East-West Pipeline, the 7 million barrel-a-day line that lets oil get around the strait entirely (The Week). Brent is up 3.1% to $107.87 after briefly touching $110 (The Week). It peaked at $126 earlier in the crisis (Wikipedia).
- Regular gas is $4.32 this morning, up 17 cents in a week, and diesel is $6.23, up 33 cents (AAA). A year ago diesel was $3.69, so it’s up 69%. AAA names the strait as the reason, and points out gas usually gets cheaper this time of year (AAA).
This week
Nothing on the data calendar today. The rest of the week is crowded.
- Tuesday: the Fed’s two-day meeting opens. The Senate also has its September window to move the Clarity Act, the crypto market-structure bill (CNBC). Polymarket has it signed into law this year at 30%, up from 22% on Friday.
- Also this week: August retail sales, which will show whether higher gas prices are already eating into everything else people buy.
- Wednesday, 2:00 pm: the decision, then the chair’s press conference.
- The Muscat talks: Iranian and Gulf officials had planned to meet in Muscat today to sign an Iran-Oman shipping route agreement, but Oman’s foreign minister said Sunday they’re postponed “in the interests of consensus” (Al Jazeera). Polymarket has an agreement signed by Sept 30 at 20%, a price set after the postponement.
A hold on Wednesday, at 18% (Polymarket), would be the surprise. A hike is the base case. The part worth reading closely is the statement, since 44% on two or more hikes means a lot of money doesn’t think Wednesday is the last one.
Who pays: the Fed can’t pump oil
A rate hike works by making borrowing more expensive. People and companies spend less, and prices cool, eventually. That works well when inflation comes from too much demand. It’s slow and blunt when inflation comes from a supply problem, and a strait where ships are still getting hit, with the main pipeline around it shut, is about as clear a supply problem as there is.
So Wednesday’s hike won’t do anything to the price of diesel. What it will do is make the credit card and the HELOC cost more, while fuel stays wherever the strait puts it. Households get a higher fuel bill and a higher borrowing bill in the same month.
The committee knows all of this. It hikes anyway because it’s worried the energy spike leaks into everything else: rents, wages, and the prices that don’t fall back when oil does. July PCE, the Fed’s preferred measure, was already 3.7% (CNBC) before crude’s latest move, and inflation has been above the 2% target since 2021.
Net net: a hike Wednesday is the base case, and gas and diesel will keep following whatever happens in the strait.
Headlines
- The White House still hasn’t decided on refined copper tariffs, as officials weigh higher manufacturing costs against more domestic mining (Reuters via AOL). Copper wires every data center going up right now, so this lands on the AI buildout whichever way it goes. Polymarket has copper cable tariffs by year end at 25%.
- Diesel has gone from $5.43 a month ago to $6.23 today, an 80-cent climb in four weeks (AAA). It’s what the trucks run on.
Decision Wednesday at 2. Receipt at 2:31.