The Fed is about to hike rates — and markets are

The 10-year Treasury just blew past 5% for the first time since 2007. Oil is over $105. Today, the Fed decides how much pain comes next.

Wall Street is bracing for impact. After two days of brutal selling, the Federal Reserve announces its September rate decision today — and traders are now betting it's a near-certainty that borrowing costs go up, not down.

Here's the setup: the yield on the 10-year Treasury note punched through 5% on Tuesday, hitting 5.04% intraday — its highest level since 2007 — before settling at 4.995%. The 30-year Treasury closed at its highest level since June 2004. The trigger? Oil. West Texas Intermediate crude spiked 4.4% to $105.83 a barrel on Tuesday, its highest settlement since May 19, while Brent crude hit $108.75.

Why oil is the problem

A critical Saudi pipeline closure has rattled energy markets this week, squeezing supply just as fighting in the Middle East escalates. Brent is up more than 2% on the week, and crude has surged nearly 50% over the past two and a half months.

More expensive oil means more expensive everything — and that's the Fed's nightmare. DoubleLine Capital's Jeffrey Gundlach warned late Tuesday that the next U.S. CPI reading could spike into the 4% range, adding that inflation "is not going down any time soon."

What the market expects

The CME FedWatch tool now shows roughly a 94% chance the Fed hikes by a quarter-point today, which would take the benchmark rate to a range of 3.75% to 4%. Just a week ago, those odds were around 59%.

And it may not stop there: traders are pricing in roughly 77% odds of a follow-on hike in December, with about an 80% chance of a half-point or more in total increases through the end of the year.

Stocks are getting crushed

The S&P 500 has fallen in six of the past seven sessions. On Tuesday, the Dow dropped 329 points (0.6%), the S&P 500 slipped 0.4%, and the Nasdaq fell 0.8%. A day earlier, the Dow plunged 500 points as the 10-year first topped 5%.

The pain isn't evenly spread. Energy and materials were the only S&P 500 sectors to finish Tuesday higher — everything else sank as rising yields made future corporate earnings worth less today.

What to watch today

All eyes are on Fed Chair Kevin Warsh's press conference this afternoon. Traders want to know not just whether the Fed hikes, but how hawkish the message is: a signal of more increases ahead could push the 10-year even higher and deepen the stock selloff. A softer tone could spark a relief rally.

One more wrinkle: Treasury Secretary Scott Bessent is testifying before the House Financial Services Committee today, facing questions on fuel prices, inflation, and those soaring bond yields.

The bottom line: September is living up to its reputation as the market's worst month. With oil at multi-month highs, yields at 19-year highs, and a hawkish Fed decision hours away, this is a "buckle up" kind of Wednesday.

The Fed is about to hike rates — and markets are already freaking out

Why oil is the problem

What the market expects

Stocks are getting crushed

What to watch today

Sources

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