Dramatic Return of Expectations for Federal Reserve Rate Hike: Surging Oil Prices Push October Rate Hike Probability to 35%

The Fed's rate expectations have undergone a dramatic reversal, with short-term US bond yields decoupling from anchoring against the backdrop of surging oil prices. Federal funds futures data now show a 35% probability of at least a 25 basis point increase in benchmark rates after the October Federal Open Market Committee (FOMC) meeting. Just a month ago, the market was betting on a 35% probability of a 50 basis point rate cut. The two-year US bond yield (US2Y) has climbed back above 3.9%, reaching its highest level since July. In July, weak employment data dragged down the yield curve of US bonds sharply at the front end, starting a steady downward trend lasting seven months, a decline that has been completely erased since the Iranian attacks. Seth Golden, Chief Market Strategist at Finom Group, pointed out that as seen in 2022, the two-year US bond yield has decoupled from the federal funds rate, with the federal funds futures market betting on rate hikes this year. He said, "In 2022, it can be said that rate hikes did not have an impact on the consumer economy, which was then and continues to be buffered by fiscal dominance (government transfers and tax legislation)." He added that the nominee for Federal Reserve Chairman, Kevin Warsh, "may push for the use of other tools in the Fed's toolbox to address rising inflation risks, rather than just relying on rate adjustments." Meanwhile, Christian Fromhertz of Tribeca Trade Group pointed out that the MOVE index, known as the "VIX index for the bond market," is surging. The rise in the MOVE index reflects increasing uncertainty in the market about interest rate paths, which historically has been a precursor to wider market volatility, making its impact more clear. The sharp fluctuations in the MOVE index may be seen as a warning signal for future spikes in the VIX panic index and declines in the stock market.