Fed Fund Futures Price 75% Odds of October Hike as Yields Break 5%

Traders now assign a little over 75% probability to another 25-basis-point rate hike at the conclusion of the next Federal Open Market Committee meeting in October, according to CME's FedWatch barometer at the time of writing. That is the problem confronting Fed Chair Kevin Warsh: a move that markets increasingly demand is a move President Trump has campaigned against since before he returned to office.

Warsh has so far walked a line between his popularity in the White House and reassuring markets of Fed independence. That balance is getting more precarious. With market expectations shifting higher and bond yields climbing, Warsh and the FOMC will face renewed credibility questions if they don't act.

The sell-off in Treasuries is doing much of the pressuring. The 10-year Treasury yield sits above 5.1%. The 30-year is above 5.4%. Deutsche Bank's Jim Reid told clients that the 10-year sell-off marked the "biggest daily jump since the market turmoil after Liberation Day in April 2025, taking it up to a post-2007 high."

"A weak 5yr auction also didn't help matters," Reid added, "with yields up to their intraday highs after $70bn of notes were sold at 5.03%, +3.1bps above the pre-sale yield."

Inflation expectations are adding fuel. Markets had been cautiously optimistic for relief on this front, with U.S. and Iranian negotiators meeting this week—a potential de-escalation of the Middle East conflict and a normalization of oil prices. Signs of an agreement remain elusive. Iran's President Masoud Pezeshkian told the U.N. yesterday that his country would never "bend the knee" but signaled it was "ready for dialogue and diplomacy." President Trump said he faced a decision: negotiating or "annihilat[ing]" the regime.

Oil prices have tracked higher as the conversations continue. Brent crude briefly hit $108 per barrel this morning. Analysts had previously suggested this week was a hinging moment for oil in the medium term.

The oil question

Macquarie's Thierry Wizman wrote in a note Tuesday: "Agreements and accords that come out of [the] meetings may determine whether the war continues and intensifies or whether an off-ramp is found."

Wizman added: "The direction of crude oil prices still bears on what happens to inflation globally and the decisions taken by central banks in response. We have seen every major central bank (including the U.S.'s Fed) cite either energy prices or 'geopolitics' as a driver of decision-making going forward. It is the key reason behind recent 'hawkish' rhetoric."

That is Warsh's conundrum in full. The FOMC demonstrated with a hike at its September meeting that it is no longer willing to "look through" the supply-side inflation shock the Middle East is creating—at least, not to the detriment of the wider economy.

Trump's response after that meeting was telling. He implied that Warsh remained on the dovish side but voted with the consensus out of submission rather than agreement. Trump also claimed the committee was acting politically—an unwelcome comment amid the Fed's continued battle to demonstrate and protect its independence.

A political opening

Bank of America's U.S. economics team suggested that hiking, even if it drew the White House's ire, might be "expedient" for exactly that reason. In a note last week, the team wrote: "Fed hikes looked politically challenging a few months ago, but they increasingly seem like an opportunity for Chair Warsh to burnish his legacy. We stick to our call for two more, in Oct and Dec."

The bank's calculus rests on the strength of the underlying economy. "The robustness of the nominal economy both increases the risks of inflation persistence and reduces the risks that hikes will cause a recession. However, if supply shocks prove persistent, the Fed might eventually have to choose between an extended inflation overshoot and a hard landing."

That closing warning frames the stakes for October. If oil keeps climbing and the talks with Iran stall, Warsh's October decision may look less like a choice and more like a trap: validate hawkish market pricing and defy the president, or hold rates and risk the credibility the Fed has spent months defending.