Diverging signals from Richmond and Cleveland Fed presidents this week underline how unsettled the September rate path remains, with markets currently pricing roughly a one third chance of a hike, down from about half earlier in the week after softer producer price data. Oil traders are increasingly decoupling price from the Hormuz conflict itself, with Brent and WTI both falling more than two percent even as vessel transits through the strait sit near three month lows, a signal that demand destruction and rising non Gulf supply are now doing more to set price than the headline geopolitical risk.
In FX, the yen’s drift back toward 160 despite a coordinated US/ Japan Ministry of Finance intervention two weeks ago suggests that verbal and even physical intervention is losing its grip on the pair, leaving the September Bank of Japan meeting as the more credible lever. Equities remain the outlier, with the S&P 500 pushing to fresh records as investors largely shrug off both the rate uncertainty and the energy backdrop.
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The Fed is genuinely divided on whether more tightening is needed, and that uncertainty is now the single biggest swing factor across oil, FX and equities heading into September.
Summary:
- Oil fell more than two percent Thursday, Brent to 87.07 dollars and WTI to 81.25 dollars, even as Hormuz vessel traffic dropped to a one week low of eight ships against a pre war average of around 130
- The IEA cut its 2026 global oil demand forecast, citing high prices and shortages, while traders point to Chinese stockpile drawdowns and rising US output as reasons oil is decoupling from war risk
- Earlier this week Trump claimed the US has total control of the Strait of Hormuz and said he intends to keep it, a claim Iran’s military and the Persian Gulf Strait Authority rejected outright
- USD JPY climbed back to around 159.5, largely reversing the gains from the coordinated BOJ and MOF intervention two weeks earlier, with the September 17 to 18 BOJ meeting now the key date (Goldman Sachs says weak US data or a BOJ miss could trigger new yen intervention )
- Thursday’s flat PPI reading eased September rate hike odds to around 35 percent from roughly 50 percent, helping push the S&P 500 to a record close of 7798.99
- Richmond Fed president Tom Barkin said it remains an open question whether a hike is needed at all, while Cleveland Fed president and FOMC voter Beth Hammack said she lacks confidence inflation will keep cooling without further tightening
The Federal Reserve’s internal debate over whether to raise interest rates again came into sharper focus on Thursday, as two regional presidents offered notably different reads on the same inflation data, even as financial markets pushed in the opposite direction on rate hike expectations.Richmond Fed president Tom Barkin, speaking (and further from him, here)to the Greenville Chamber of Commerce, argued that the case for another hike is far from settled. He said the question was not whether inflation would return to the Fed’s two percent target, since the FOMC has made clear it is committed to that outcome, but how it gets there, and whether the Fed will actually need to raise rates or whether inflation is already on a path down to target on its own. Barkin pointed to tariffs, elevated oil prices and surging demand tied to the artificial intelligence buildout as shocks he expects to fade over time, arguing that if those pressures do ease, the current level of interest rates may already be restrictive enough to bring inflation down without further tightening. Barkin does not hold a vote on the FOMC this year, but as with all twelve regional presidents, he attends every meeting and takes part in the discussion that shapes the eventual decision, making his comments a useful read on the committee’s centre of gravity even though he cannot swing the head count. Cleveland Fed president Beth Hammack, who does vote this year and already dissented in favour of a hike at the July meeting, struck a more urgent tone. She said she was pleased to see recent inflation readings come in lower, but did not have confidence that trend would continue or that it would bring inflation back down to the two percent target. Earlier in the week she had argued that a single quarter point move would likely do little on its own, suggesting some unspecified number of hikes would be needed, while declining to commit to an end point. Hammack sits alongside Minneapolis Fed president Neel Kashkari and Dallas Fed president Lorie Logan as the three voters who pushed for tightening in July, a bloc that continues to pull against the more cautious centre of the committee that Barkin appears to represent. The split lands at a moment when broader market pricing is actually drifting the other way. A flat July producer price reading on Thursday, following an in line consumer price report a day earlier, pushed the market implied odds of a September hike down to around 35 percent from close to 50 percent earlier in the week, with two year Treasury yields easing six basis points in response. Equities have taken the softer data as a green light, with the S&P 500 closing at a record 7798.99 on Thursday, its first close above 7800, while the Nasdaq and Russell 2000 also pushed to fresh highs.The same divide is playing out beyond Fed commentary. Oil fell sharply Thursday even as the Strait of Hormuz conflict shows no sign of resolution, with vessel traffic through the waterway near three month lows and the International Energy Agency cutting its 2026 demand forecast. In currency markets, the yen’s slide back toward 160 against the dollar despite a coordinated intervention two weeks ago points to the same underlying theme running through oil, FX and now Fed policy: reflexive risk narratives are losing their grip, and the incoming data, whether inflation prints or BOJ decisions, is doing more of the work than headline events. With the Fed’s next meeting in mid September and the BOJ deciding days apart on the seventeenth and eighteenth, both central banks are converging on the same window as the moment that finally forces clarity.
This article was written by Eamonn Sheridan at investinglive.com.