Treasuries Gain on Warsh’s Hawkish Outlook and Oil Surge, Fed Eyes September Hike

U.S. Treasury yields edged higher this week, driven by two key forces: the newly appointed Fed Chair, Kevin Warsh, signalling a more hawkish stance, and a sharp uptick in oil prices that has pushed inflation expectations back up.

The June Federal Open Market Committee (FOMC) meeting clarified that the Fed’s policy path remains unchanged for the next month, with the committee split evenly on whether to raise rates this year. The Fed’s own Beige Book, however, reflected a muted tone on pricing, while June’s consumer‑price index (CPI) fell well below forecasts and the producer‑price index (PPI) remained benign. In addition, the June jobs report showed non‑farm payrolls rising by just 57,000—far below the 164,000 average for the previous three months.

These data points have shifted market expectations from an 80 % probability of a 25‑basis‑point (bp) hike later this year to a near‑complete discount of a 50‑bp increase. Even though nine FOMC participants still project a rate hike by December, the consensus is that most of them will be non‑voters this year.

Oil prices have surged, lifting the expected cumulative Fed rate hikes by 20 bp over the first quarter of 2027 in the past week alone. However, gasoline prices have not kept pace with the oil spike. While oil briefly fell below $70 per barrel, gasoline prices have hovered just above $4 per gallon, a level that has not been breached in recent months. Natural‑gas prices in the U.S. have also remained largely unchanged thanks to ample domestic supply.

The energy picture remains fragile. A de‑escalation of the Middle‑East conflict could force oil prices back down and ease inflationary pressure, but a renewed Houthi blockade of Red Sea shipping lanes could push prices toward $120 per barrel, spiking headline inflation and prompting the Fed to raise rates.

With the mid‑term elections less than four months away, the Fed may also consider the political climate when setting policy. For now, the consensus leans toward a September rate hike, but the path remains uncertain as global supply dynamics and domestic data continue to evolve.