Financial Planning / The Compound Effect
The Fed meets Wednesday, and for the first time in years a raise is on the table
| 4 min | By Heath J. Harris
Hot inflation and $100 oil have markets pricing a rate hike at the September 16 Fed meeting. What a quarter point would actually change for your money.
Summary
- The Fed meets Tuesday and Wednesday, and futures markets now price a quarter point rate hike at roughly nine in ten odds, up from just better than a coin flip going into the week.
- The chain that got us here: a Gulf war pushed oil past $100, oil fed into producer prices on Thursday, and Friday's CPI showed core inflation still running above forecast.
- A hike would be the Fed's first increase since July 2023, and it mostly moves the short end: savings, money market, and CD yields.
- The long end is not waiting for permission. The 30 year Treasury touched 5.39 percent this week even as the Treasury doubled its buyback operations, and the 10 year finished within sight of 5 percent for the first time since 2023.
- Mortgages rose a third straight week to 6.76 percent. Whatever Wednesday brings, structure beats forecasting.
The last time the Federal Reserve raised interest rates, a 30 year Treasury paying 5.39 percent would have sounded like a typo. That was July 2023. Next Wednesday at 2 p.m., there is a real chance it happens again.
The path here took three steps, and all of them ran through this week.
Step one: oil
The Gulf war escalated. Strikes near the Strait of Hormuz sent West Texas crude past $104 on Thursday, its highest since May, with Brent above $106, before both eased Friday on word that Iran meets the Gulf states in Oman on Monday. Oil is the one price that leaks into every other price, because everything you buy spends time on a truck.
Step two: the prints
Thursday morning, August producer prices rose 0.4 percent for the month, with the goods side up over 1 percent. Friday morning, the August CPI landed: headline up 0.4 percent for the month and 3.4 percent for the year, with gasoline alone accounting for more than a third of the monthly rise. The headline matched forecasts. The core reading, which strips food and energy, came in a tenth hot. Five years past the 2021 surge, inflation still refuses to sit down.
Step three: the odds
Futures markets went into the week pricing a September hike at a little better than a coin flip. By Thursday the odds were near seventy percent. Within hours of Friday's CPI they touched ninety. The new Fed chair, Kevin Warsh, told the Jackson Hole conference two weeks ago that the summer's better inflation readings did not convince him the trend had truly improved, and Fed officials have been in their pre meeting blackout since September 5, so the market is filling the silence with math.
What a quarter point actually touches
Mostly the short end, which is to say, your cash. High yield savings, money markets, and new CDs follow the overnight rate within weeks. If the cash bucket of your plan is sitting in a big bank account paying almost nothing, this is the moment to fix that regardless of what Wednesday brings.
What a hike does not do is command the long end, and the long end is where retirement math lives. The 30 year Treasury climbed from 5.25 to 5.39 percent this week even though the Treasury Department doubled the size of its long bond buyback operations, its quiet attempt to steady that market. Mortgages followed: 6.76 percent on the average 30 year, a third consecutive weekly rise. Higher long rates keep improving the pricing on income products and new bond ladders. They keep punishing long duration bond funds. Both are the same fact wearing different clothes.
One practical note for anyone sitting on maturing CDs or Treasury bills this month: if the Fed hikes, the temptation is to stay short forever and keep rolling. Remember what the short end gives, the short end can take away. The 5 percent handles on longer maturities are the ones a retiree can actually lock in for the years the plan needs, and those are set by the long end, not by Wednesday's vote.
Our read
Do not spend the weekend positioning for Wednesday. A hike nudges cash yields up. A hold leaves them where they are. Either way, the structural question is the one we asked last week and will keep asking: do you know which dollars you would spend in a downturn, and does any part of your income depend on selling something at a bad price? Get that right and the Fed's Wednesday becomes something you read about, not something you feel.
If you want help pressure testing your plan against both outcomes, our team at Compound Advisory does this work every week. You can schedule a complimentary assessment at https://compoundadvisory.co/retirement-clarity-assessment.
Frequently Asked Questions
When is the Fed decision?
The Federal Open Market Committee meets Tuesday and Wednesday, September 15 and 16, with the decision announced Wednesday at 2 p.m. Eastern.
Why would the Fed raise rates now?
Inflation has stayed above target for five years, oil crossed $100 on the Gulf escalation, August producer prices rose 0.4 percent in a month, and Friday's CPI put core inflation hotter than forecast. The new Fed chair has been explicit that the 2 percent target still stands.
What does a quarter point hike change for a saver?
High yield savings, money market, and new CD rates tend to follow the short end within weeks. For cash you plan to hold, quotes should firm slightly.
Does a hike control mortgage or long bond rates?
Not directly. Those price off the long end, which has been rising on its own. The 30 year mortgage just posted its third straight weekly increase at 6.76 percent.
What if the Fed holds instead?
For most retirement math the long end matters more than the overnight rate, and the long end has already voted. A hold changes Wednesday's headlines more than it changes a well built plan.