Oil is back above $90. That’s bad news for markets already worried about inflation.
Brent crude jumped above $90 a barrel on August 31 as renewed hostilities between the U.S. and Iran sent fresh risk through global energy markets.
Brent gained about 2.5% to $90.25 before trading near $90.60.
The move immediately rippled into financial markets. S&P 500 futures fell roughly 0.4%, while Nasdaq 100 futures slipped about 0.5%, according to MC Markets.
But oil wasn’t the only problem.
Traders were also sharply increasing their bets on a September Federal Reserve rate hike.
September Rate-Hike Odds Jump
Markets now see a significantly higher chance that the Federal Reserve will raise interest rates at its September 16 meeting.
The probability of a 25-basis-point increase rose to roughly 57% on August 31, according to CME Group’s FedWatch tool.
Before Fed Chair Kevin Warsh’s remarks at Jackson Hole, the probability had been around 35%.
That represents a substantial repricing of expectations in a matter of days.
And rising oil prices could make the Fed’s decision even more complicated.
Why $90 Oil Matters to the Fed
Higher crude prices can feed directly into inflation by increasing the cost of fuel, transportation and other energy-intensive goods and services.
That creates a difficult environment for central bankers.
The economy may need lower borrowing costs, but an energy shock can push inflation in the opposite direction.
Warsh had already warned investors about persistent price pressures.
Warsh Points to 3.7% Inflation
In remarks delivered on August 28, Warsh pointed to 12-month personal consumption expenditures (PCE) inflation of 3.7%, well above the Federal Reserve’s 2% target.
He argued that keeping inflation under control should remain the central bank’s primary focus.
Those comments had already caused traders to reassess the outlook for monetary policy.
Then oil moved higher.
Now the Fed is facing two inflation signals at once: persistent underlying price pressure and a fresh jump in energy costs.
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Stocks Feel the Pressure
The immediate market reaction was predictable.
Higher oil prices can raise inflation expectations, while higher interest-rate expectations increase the discount rate applied to future corporate earnings.
That combination tends to weigh particularly heavily on growth-oriented stocks.
The decline in S&P 500 and Nasdaq 100 futures therefore reflects more than concern about crude prices alone.
Investors are reassessing both the inflation outlook and the path of Federal Reserve policy.
The Market’s New Question
Until recently, traders had been focused heavily on whether the Fed would ease policy.
That debate is becoming more complicated.
If oil remains elevated because of escalating U.S.-Iran tensions, policymakers could face renewed inflation pressure just as markets are trying to anticipate the next move in interest rates.
The result is a delicate setup heading into September.
Oil above $90 raises inflation risks. Inflation keeps the Fed cautious. A more hawkish Fed can pressure stocks.
And that means the next move in crude could matter almost as much for markets as the Fed’s next decision.