Fed’s September Rate Hike Odds Surge to 73%: Why Falling Oil Prices Aren’t Enough

Despite plunging oil prices, the probability of a Fed rate hike by September has risen to 73%.

The Iran War’s Ripple Effect on Inflation

The closure of the Strait of Hormuz and ongoing conflict have moved beyond a simple energy supply issue; Core Personal Consumption Expenditures (PCE) have risen by 0.4%, pushing inflation into non‑energy components. This spread drives price pressures across every stage of production, not just at the pump.

Oil Price Collapse vs. Persistent Core Inflation

WTI crude fell from $118 to $74, yet the rise in core PCE and delayed supply‑chain disruptions mean higher costs for plastics, chemicals, and packaging. The inflationary momentum remains anchored in non‑energy sectors.

FedWatch Tool Signals a Sharp Jump

■26% likelihood (June 12) → 73% likelihood (July 12) – CME Group FedWatch Tool

■Core PCE up 0.4%, fueling underlying inflation

■Rerouted supply chains raise transportation and production expenses

■Companies using plastics and synthetic polymers pass cost hikes onto consumers

Market and Portfolio Takeaways

■EM (Emerging Markets) currencies may depreciate as Fed rate‑hike expectations rise; pressure intensifies on JPY, KRW, and CNY.

■While 10‑year U.S. Treasury yields climb, EM bonds could see widened risk premia.

■Energy and chemicals sectors benefit from hedge strategies against oil volatility, whereas inflation‑linked assets like TIPS become attractive for inflation‑driven risk.

Kemal Tekin – Head of Emerging Markets Desk

The prospect of a Fed rate hike reshapes Asia‑Pacific risk premiums. With the Bank of Japan (BOJ) stance, China’s property woes, and regional geopolitical tensions, volatility in EM portfolios is set to rise. In this environment, preserving liquidity through short‑term FX and bond positions is essential for capital protection.