Gulf Ministers Meet Iran Days Before Fed Decision Priced 86.5% for a Hike

Priced at 86.5%, a hike leaves 13.5% for the alternative. 86.5 divided by 13.5 is a little over six, so being right about the increase collects roughly a sixth of what being right about a hold would ^[1][16]. Seoul Economic Daily reports that market participants are leaning so heavily toward a hike that a hold this month would deliver the bigger shock ^[6]. The 86.5% figure appears in that report's headline; the report does not say which market produced the number, only that the odds are climbing steeply ^[22].

What the committee would be tightening into is a fuel bill. AAA put the average retail diesel price at $6.06 a gallon on the 11th, against $3.71 a year earlier. That is $2.35 more for every gallon burned by the trucks, farm machinery, fishing boats, buses and furnaces that run on it ^[15][17][21]. Saudi crude supply averaged 6 million barrels a day in August, 2.3 million below July and the lowest in more than three decades, according to the International Energy Agency. Output fell about 28% in a single month ^[12][18]. Higher policy rates do not move Houthi fighters off Perim Island, which they took the day after seizing the port of Mocha ^[11].

The case for hiking anyway has little to do with crude. Analysts cited by the same outlet say that if the Fed stands pat again, confidence in Chair Kevin Warsh's stated resolve to defend the inflation target could erode immediately ^[7]. Running the other way is the fiscal side: Trump floated a pledge, "If we win the election, we will hand out $5,000 to every adult," while insisting he wants rate cuts ^[5].

The calendar puts the energy input in front of the vote. The foreign ministers of the six Gulf Cooperation Council states and Iran meet in Salalah on the 14th, brokered by Oman, their first gathering since the war began on Feb. 28, the Financial Times reported ^[10]. The Fed meets less than a week after the 12th, so the Gulf's attempt at an exit lands before the committee votes ^[2][20]. Oil has already fallen on the news, and it fell from a high base: Brent's 2.81% decline still left it above $100, which means it was above about $102.89 before ^[9][19]. Saudi Crown Prince Mohammed bin Salman called Trump twice on the 10th to ask for airstrikes on the Houthis and was turned down, Axios reported ^[13]. Iran's foreign ministry spokesman, Esmaeil Baghaei, said on the 11th that the safety of shipping in the Strait of Hormuz cannot be guaranteed while the U.S. naval blockade and economic war continue ^[14].

If Oman brokers a passage arrangement and Brent breaks below $100 by the 17th, the Fed can still raise rates on the credibility argument, which is where the case has sat all along. If it holds, the 13.5% side collects on a repricing of the curve and of Warsh's stated resolve ^[16][7]. If it hikes, it spends room it would want in December, when $6.06 diesel has had another quarter to thin freight demand ^[15].

I'd expect the increase. The check on the shock framing is the hold itself. If the Fed stands pat and the curve barely moves, the 86.5% was conviction nobody funded, and the equity market that rose 0.98% on the Dow after five losing sessions was not positioned for a hike ^[8].