Oil Above a Hundred Has Made Next Week's Fed Meeting a Coin Toss on a Rate Rise, and the Treasury Tripled Its Buybacks

What changed is oil. A barrel above a hundred dollars feeds into American petrol prices within a fortnight and into the inflation figures within a month, and it arrives at a moment when inflation was already well above the two per cent target and the fiscal deficit had just posted its largest July since 2021. A central bank that would normally look through a supply shock cannot easily do so when the bond market already doubts its resolve. The two-year yield, the cleanest read on where the market thinks policy is going, closed at 4.39 per cent on 8 September against 4.17 two weeks earlier, and the ten-year at 4.80 on the Fed's own series before Wednesday's move higher.

The buyback

The other piece of Wednesday's news came from the Treasury, which said it would triple its buyback operations in longer-dated government debt to six billion dollars. Buybacks are a liquidity tool: the Treasury purchases old, thinly traded bonds and funds the purchase by issuing new ones, keeping the market for its debt orderly. Tripling them at a moment when long yields are near twenty-year highs reads as an attempt to support a market that has been selling off, and the market took it that way, with yields rising rather than falling on the announcement. The programme and the forty-trillion-dollar debt behind it were the subject of our August report.

What it means here

Gulf currencies are pegged to the dollar and Gulf central banks move with the Fed. A quarter-point rise in Washington on 16 September would be matched in Abu Dhabi, Riyadh, Doha and Manama the same evening, and would reach variable-rate mortgages and corporate loans within the month. For an economy already absorbing reduced airline schedules, a restricted zone at its main shipping lane and a property market that its largest developer expects to adjust by five to ten per cent, covered in our report on Alabbar's remarks, dearer money is one more weight.

The reading of the week is simple. Oil is doing the Fed's work in the wrong direction. If Brent holds above a hundred through Monday, the hike is the base case; if the Gulf quietens and the price falls back into the nineties, the committee has room to wait. The people who will decide American interest rates next week are, for the moment, the ones firing missiles across the Gulf of Oman, and neither the Fed nor the market can do much about that except watch. The tanker strikes and the Jordan attack that pushed the price over the line are in today's report from the Gulf.