On the Eve of the Fed Decision: Oil Tops $100, Treasury Yields Break 5%—What Should Traders Watch Tonight?

With oil prices back above $100 and US Treasury yields once again breaking above 5%, the market is reassessing whether the Federal Reserve will tighten policy again?

The recent rise in energy prices and the rebound in inflationary pressure have caused interest rate expectations to shift rapidly.

A market that previously focused more on when the Fed would ease has begun to discuss again whether rate hikes are needed and how long high rates will last.

This has also significantly increased the importance of this week's FOMC meeting.

At 2 a.m. Beijing time on September 17, the Fed will announce its latest rate decision and simultaneously update its economic forecasts.

For traders, what is truly worth watching at this meeting is not just the final rate number, but the Fed's latest assessment of inflation, energy prices and the future interest rate path.

Why has this Fed meeting suddenly become more important?

The change comes first from inflation. The latest US August CPI rose 0.4% month on month and 3.4% year on year, with gasoline prices up 3.9% in the month, contributing more than one-third of the month's overall CPI increase.

At the same time, supply risks from the situation in the Middle East continue to push energy prices higher.

As of September 15, Brent crude had risen to around $107 per barrel.

The stronger inflation data, combined with rising oil prices, has also rapidly changed the market's view of this meeting.

Previously, the market discussed more whether the Fed would continue to hold steady, but the latest Reuters survey shows that 85% of surveyed economists expect a 25 basis point rate hike this week, raising the federal funds rate target range from the current 3.50%–3.75% to 3.75%–4.00%.

In fact, at its July meeting the Fed already made clear that inflation remains above the 2% target and that supply shocks such as energy are also pushing up some prices.

Therefore, the question this meeting truly needs to answer has become whether inflationary pressure is sufficient for the Fed to restart rate hikes, and how long tightening policy may last.

Why has the 10-year US Treasury yield broken above 5% again?

Changes in interest rate expectations have already been reflected in the bond market in advance.

On September 15, the US 10-year Treasury yield briefly rose above 5.021%, breaking through near the October 2023 high and entering a high range not seen since 2007.

The logic behind this is not complicated.

Rising oil prices increase inflationary pressure, and inflation risks in turn strengthen the market's expectation that the Fed will tighten policy further.

In this situation, bond prices come under pressure and yields rise accordingly.

The 5% 10-year US Treasury yield is worth watching because it affects more than bonds themselves.

As an important global reference for long-term interest rates, persistently high US Treasury yields will further affect corporate financing, mortgages, stock valuations and global capital flows.

Therefore, after this FOMC meeting, whether US Treasury yields can remain above 5% will also be an important signal for observing how the market reprices interest rate expectations.

What is most worth watching in this Fed decision?

If a rate hike has already become the market's mainstream expectation, then whether a hike actually happens may not necessarily be the most important information.

The first thing worth watching is the economic forecasts and the future interest rate path.

The September meeting is a quarterly meeting with a Summary of Economic Projections (SEP), and the Fed will update its views on economic growth, the unemployment rate, inflation and the policy rate.

Traders especially need to watch two questions:

Will future interest rate expectations continue to be raised? How does the Fed assess the impact of energy prices on inflation?

If the Fed believes current inflationary pressure still requires further policy tightening, the market may continue to raise expectations for subsequent rate hikes.

Conversely, if the Fed raises rates but remains cautious about the next policy step, the hawkish expectations already priced in by the market may also be revised.

Which market reactions can traders watch?

For EagleTrader traders, several markets can be closely watched after this decision.

The US Dollar Index, as well as EUR/USD and USD/JPY, can directly reflect the market's reassessment of the US interest rate path;

For gold, changes in the dollar and US Treasury yields need to be watched at the same time; crude oil remains under the dual influence of geopolitical risks and a high interest rate environment.

The US 10-year Treasury yield may be one of the most direct indicators for judging how the market actually interprets this meeting.

If the information released by the Fed is more hawkish than market expectations, expectations for high rates may be further strengthened;

If the policy stance is not as aggressive as the market had previously bet, it may trigger another round of expectation revisions.

Therefore, as the Fed decision is about to be announced, rather than judging in advance which direction the dollar, gold or crude oil will definitely move, it is better to watch whether a new expectation gap emerges between the policy finally announced and the expectations already priced in by the market.

This may also become the key to the repricing of the dollar, US Treasuries and major global assets in the period ahead.

This article is solely for EagleTrader's international macroeconomic and market information sharing and does not constitute any investment advice.

Financial markets involve risks; please trade cautiously based on your own circumstances.