Fed Pulls the Pin: War Gave Inflation an Alibi

Bond markets are pricing a better-than-one-in-three chance that the Federal Reserve raises interest rates at its Wednesday meeting — a dramatic repricing driven by oil markets that spiked after US strikes on Iran sent energy traders into defensive positioning, according to Bloomberg.

The mechanics are straightforward and the politics are not. Higher oil prices feed into headline inflation figures with near-mechanical speed. The Fed, which spent the better part of two years trying to convince markets it had tamed price growth, now faces a meeting in which a rate hike — the kind it publicly walked away from months ago — has become a live option again. Per Yahoo Finance, July's inflation data has turned what was expected to be a quiet policy confirmation into a genuine showdown between governors who want to hold and hawks who see the Middle East as having done their argument for them.

The number that will follow Fed Chair Jerome Powell into that room on Wednesday: oil's contribution to the core inflation calculation has been revised upward three consecutive months running.

A rate hike now would land on American households already absorbing higher fuel costs. Mortgage borrowers, credit card holders, small business owners carrying variable-rate debt — none of them declared war on Iran. All of them will pay for it anyway.

That is the part the press conference will not cover in plain language.