IBK Says Middle East Price Pressures Are Building, Raising Odds of September Fed Hike

Geopolitical instability in the Middle East is pushing up global oil and commodity prices, bringing the possibility of another Federal Reserve rate increase back into focus, according to a report from IBK Investment & Securities.

In a Sept. 11 report, IBK Investment & Securities said the latest Iran crisis is stoking concerns that clashes could broaden to involve the U.S. and China, adding upward pressure to oil and commodity prices more broadly. Ahead of next week's Federal Open Market Committee meeting, that could further heighten market wariness over additional tightening.

The report paid particular attention to oil. Brent crude has risen about 30% since the start of the second half, climbing above $100 a barrel, while West Texas Intermediate has also remained strong. On Sept. 10, October WTI settled at $102.48 a barrel on the New York Mercantile Exchange, up 6.69% from the previous session.

IBK Investment & Securities also cited the difficulty of easing Middle East tensions in the short term as another source of concern. With the current conflict potentially lasting through the U.S. midterm elections, upward pressure on crude prices may not dissipate quickly.

Inflation pressures are not confined to energy. Copper prices have climbed as investment in artificial intelligence data centers and power grids expands, while prices for key agricultural commodities including coffee, cocoa and sugar have also risen sharply on extreme heat and crop concerns. A global commodity price index has also moved above the peak reached during the Iran crisis last spring to the highest level of the year.

Bond markets are also reflecting concern over tighter policy. The yield on the U.S. 10-year Treasury rose to as high as 4.97% intraday a day earlier, nearing the October 2023 peak of 4.99%. The report said a move above 5% could add to the psychological burden on equities.

CME FedWatch now puts the probability of a September rate hike at about 60%, the report said. Given strong August employment data and the recent spike in oil prices, IBK Investment & Securities said an unexpected increase cannot be ruled out. Even if rates are left unchanged at this meeting, concern over tighter policy could persist if the Fed leaves open the possibility of an additional hike in the fourth quarter.