Brent Tops $95. Is Oil Now Raising the Risk of a Fed Hike?

Brent was trading at $95.67 a barrel at 0100 GMT on September 4, while WTI stood at $91.56, leaving both benchmarks on track for their strongest weekly gains since mid-July. Yet the market-implied probability of a September Fed hike has fallen to roughly 50% from about two-thirds after Governor Christopher Waller said he could support holding rates if August inflation continues to cool. Higher crude is still adding to the Fed's inflation risks, but the latest repricing shows that $95 oil alone is not determining the September 16 decision.

Key Takeaways

• Brent traded at $95.67 and WTI at $91.56 in early September 4 trading, up about 7.1% and 9.8% for the week, respectively.

• Brent briefly reached $97.29 on September 3 before settling at $95.52, while WTI settled at $91.30 as Middle East supply fears competed with renewed hopes for a Russia-Ukraine settlement.

• September Fed hike odds have fallen from roughly two-thirds when this article was published to around 50% after Governor Christopher Waller signalled that continued disinflation could justify another hold.

• Waller said higher energy prices remain an upside inflation risk, but he does not currently see them as a significant source of ongoing inflation pressure. August inflation data will heavily influence his September vote.

Oil Stays Above $95, but the Fed Hike Trade Has Weakened

Brent settled at $95.52 on September 3 after climbing as high as $97.29 earlier in the session, while WTI settled at $91.30. In early September 4 trading, Brent was back at $95.67 and WTI at $91.56. Rising U.S.-Iran tensions and risks around commercial shipping through the Strait of Hormuz continued to support crude, although signs of a possible Russia-Ukraine settlement helped prevent Brent from holding its intraday highs.

By September 3, the two-year Treasury yield had eased to 4.34% and the 10-year to 4.77% as hike expectations retreated. July's FOMC minutes also caution against reading the long end as a pure oil-inflation signal: during the earlier oil surge, inflation compensation moved little while nominal yields rose alongside higher real rates and tighter policy expectations. As of September 3, the 10-year breakeven stood at 2.35% and the five-year forward rate at 2.33%, showing little evidence that longer-run expectations were becoming unanchored.

The repricing predated September's oil surge, with CME FedWatch putting the probability of a September hike at 66.1% on August 31. After Waller's September 3 remarks, that probability fell to 50.4% from 63.2% the previous day.

The July meeting had already exposed a hawkish minority. The Fed held rates at 3.50% to 3.75% by a 9-3 vote, with Beth Hammack, Neel Kashkari and Lorie Logan preferring a quarter-point increase. That decision came only days after Brent had traded above $100, so those dissenters were already weighing substantial energy-price pressure.

How Oil Can Reach the Fed’s Inflation Test

The latest oil shock arrives as headline PCE inflation comes in at 3.7% and core PCE at 3.3% in July. The Fed is therefore assessing another energy shock while its preferred inflation measures remain well above the 2% target.

The first channel is direct headline inflation. Gasoline prices were already 24.6% higher than a year earlier in July, while the broader energy index was up 14.7%. Sustained crude prices near current levels would increase the risk that fuel prices rise again after July’s monthly decline.

The second is broader pass-through. Higher fuel, freight and production costs can eventually reach prices outside energy if companies stop absorbing them. July’s FOMC minutes noted that some business contacts had been compressing profit margins to absorb higher input costs, while further Middle East disruption could make avoiding consumer price increases more difficult.

The third is inflation expectations. San Francisco Fed research published on August 31 found that higher expected gasoline-price growth tends to lift households’ broader one-year inflation expectations. The average relationship was moderate, but upward revisions to expected gas prices had a clearer effect than downward revisions.

Dallas Fed modelling shows why the duration of an oil shock matters. In a hypothetical scenario where the Strait of Hormuz remained closed for three quarters, its model estimated a 1.1 percentage-point increase in 2026 headline inflation, 0.3 percentage points in core inflation, and as much as 0.5 percentage points in one-year inflation expectations. Those figures are not forecasts for today’s oil move. They show how a prolonged supply disruption could turn an energy-price shock into a broader monetary-policy problem.

Waller offered an important counterweight on September 3, stating elevated energy prices remain an upside risk but are not currently a significant source of ongoing inflation pressure because broader pass-through has not materialised so far. The risk rises if high crude persists and interrupts the recent improvement in underlying inflation.

The September 11 CPI Will Miss This Oil Surge

The September 11 CPI covers August, so September's renewed oil surge will not appear in it. With the Fed meeting on September 15-16, current fuel prices, short-term inflation expectations and the persistence of the oil rally will provide more immediate evidence on the new shock than August CPI can.

July’s $100 Brent Spike Shows Why Persistence Matters

Brent moved above $100 in late July, intensifying concerns that the energy shock could keep inflation and interest rates higher.

What followed provides the more useful comparison. July payrolls fell by 23,000, with May and June employment revised down by a combined 103,000. July CPI then showed energy falling 1.5% during the month, gasoline dropping 2.9%, headline inflation easing to 3.4% and core CPI slowing to 2.5%.

By August 12, September hike odds had fallen back toward 40%.

The July episode showed that crossing an oil-price threshold carries less weight when crude retreats and the rest of the data soften. Staying near $95 for several weeks while broader inflation remains firm would present a different policy test.

Jobs and CPI Can Still Overturn Current Hike Odds

Three major U.S. releases still remain before the Fed votes, starting with the August employment report on September 4. Data released since this article was published have sent mixed signals: ADP estimated that private employers added only 38,000 jobs in August, the slowest pace since January, while the ISM Services PMI rose to 55.4 and its Prices Index climbed to 72.6, the highest reading since October 2022.

Waller said August inflation will heavily influence his vote: continued progress toward 2% would support a hold, while hotter inflation could justify a hike. That leaves September pricing close to 50/50.

CPI remains the final major consumer-inflation report before the meeting, even though it cannot capture September’s renewed oil surge. Firm core inflation alongside Brent staying near or above current levels would leave less evidence for the Fed to wait. Softer employment and inflation data combined with another retreat in crude would weaken the case for an immediate increase.

Frequently Asked Questions

Does higher oil always make the Fed raise interest rates?

No. A temporary supply-driven oil spike can raise headline inflation without creating persistent underlying inflation. The policy risk increases when higher energy costs last long enough to reach other prices or shift inflation expectations.

How high would Brent need to go before the Fed reacts?

The Fed has no stated Brent threshold. The policy risk depends more on how long oil stays elevated, whether higher energy costs spread into broader prices and whether inflation expectations rise.

When is the next Fed interest rate decision?

The next FOMC meeting runs from September 15 to September 16, 2026, with the rate decision due on September 16. The meeting will also include an updated Summary of Economic Projections.

The September Test

Brent near $96 keeps energy inflation in the Fed's September calculation, but Waller's comments have pushed hike odds back toward 50%. The August jobs report comes next, followed by PPI on September 10 and CPI on September 11; $95 oil becomes harder to dismiss if it persists while broader inflation stops cooling.