By Douglas Porter

September 18, 2026

100: This week’s Fed rate hike was essentially imposed upon it by soaring energy prices. Some would point to sticky core inflation, or the AI spending boom and the related surge in stocks, or even a snug job market as factors. But Chair Kevin Warsh highlighted in his presser a changed “geopolitical” backdrop—read “Iran conflict”, with perhaps a dose of tariffs—as the major difference from earlier in the summer when the Fed stayed on hold. In barely two months, WTI has rocketed from an average weekly price of less than $70/barrel to above $100 this week. That snap-back, with little prospect of near-term relief, will spark higher headline inflation, and threatens to crank inflation expectations in an economy already operating with little slack.

25: As a result of feisty energy costs, the Fed hiked 25 bps to 3.75%-to-4.00%, the first rate hike in more than three years. After the latest round of warm inflation readings—and the hawkish rhetoric flowing from Jackson Hole in late August—markets were well-primed for the move. Warsh noted that the small step removed some of the accommodation that short-term rates had been providing (even as the Fed’s survey of members saw the long-run funds rate at 3.25%). Driving home the point that broader global forces are at play, mostly energy costs, the rate hike followed a similar 25 bp step by the ECB last week, and by the Bank of Japan on Friday. The Fed almost never moves in just one gulp, barring some dramatic external development; in the past 30 years, the only one-off hike was cut short by the Asian crisis in 1997. We thus look for a follow-up 25 bp step by year-end, with the risks tilted to further moves in early 2027.

6: Above and beyond triple digit crude oil costs is the pressing reality of much higher product prices. While relatively lofty gasoline prices are the major pain point for consumers, it’s the rocket ride above $6/gallon for diesel that is truly threatening global inflation. The implied crude oil price from recent levels of diesel in the U.S. is closer to $200/barrel than the current headlines of about half that level. That’s a roundabout way of saying that crack spreads remain at levels rarely seen before (the 3-2-1 is around $66/bbl), with record diesel prices causing most of the extreme move. Scant spare refining capacity and increased regulatory costs were the dry tinder, and “geopolitical developments” were the match for the diesel firestorm. The damage to Persian Gulf supplies from the conflict, and Russia’s halt of diesel exports due to its own war with Ukraine, have led to a global shortfall of the key fuel. While not a major direct factor in the consumer basket, other than related heating oil, the test will be to what extent these soaring diesel costs are passed along to consumers—and that will be driven by how firm the underlying economies remain.

5: It wasn’t solely energy prices that forced the hand of the Fed (or the ECB or the BoJ). The sustained back-up in bond yields over the past six months also cast a strong vote for hikes. 10-year Treasury yields punctured 5% in the past week to reach the highest level since June 2007, while Japan’s 10-year yields hit 3% for the first time since 1996. The flare-up in headline inflation from higher energy prices, the demand for capital from the AI spending boom, and fiscal concerns have all played a role in the global back-up in bond yields. The series of rate hikes in the past eight days from the Big 3 central banks seemed to initially calm the fire in bonds, with investors reassured that policymakers—especially at the Fed—are serious about fighting inflation. However, 10s were back at 5% by week’s end, as oil turned up again, revealing what’s truly driving markets, and likely policy as well.

3: Even with the sustained upward pressure on oil and bond yields, the ultimate degree of rate hikes is likely to be relatively mild, with inflation still holding close to 3%. Some of the hawkish persuasion were quick to point out that not only does the Fed almost never move just once, rate hiking cycles often entail at least six steps and hundreds of basis points of hikes. But this is no typical cycle, with overnight rates already starting at above inflation and above long-run neutral (as opposed to 0.125%, 0.125%, and 1% in the past three cycles). One could point to the cycle before that as a rough guide, when the Fed hiked by 175 bps from 4.75% to 6.50% from 1998 to early 2000, when CPI trends were broadly comparable to today and during another tech boom. But that cycle triggered a wicked bear market and a recession, prompting the Fed to subsequently slash rates 550 bps—all signs of monetary overkill. Almost all major economies are currently sporting headline inflation rates of close to 3%—each of the U.S., the Euro Area, Britain, Australia and Canada. While a bit warm for comfort, that doesn’t yet cry out for a long series of rate hikes.

0: Perhaps the most surprising aspect of the Fed meeting was the fact that the vote to hike was unanimous at 12-0. Just two weeks ago, Governor Waller conjured up his inner John Lennon to implore “give disinflation a chance”, a sentiment that was likely shared by other voters. The fence-sitters may have been pulled along to display absolute unity, to make the hike decision appear to be obviously the correct step. As for the Chair’s vote, we may never know if he drove the vote or was a passenger to save face (as a certain high-profile observer suggested). But the important message for the markets is that Warsh’s Fed will indeed carry out policy as seen as appropriate given the economic and financial circumstances, and will not succumb to political pressure. And that wasn’t obvious six months ago.

1 Trillion: Canada’s economic data and monetary policy outlook took a bit of a backseat this week to the high-profile Investment Summit in Toronto, as well as a not-unrelated offer of “Associate” EU membership. The summit was aimed at attracting or generating $1 trillion in new investment over the next five years. Time will tell on that metric but the true new news was Ottawa’s Productivity Mega Deduction. It will build on earlier moves to allow immediate expensing of some capital spending, this time widening the net to include pipelines, software, and other equipment, at a fiscal cost of just over $7 billion per year. Along with opening up the nation’s four largest airports to private investment, this is a big step to help draw in foreign capital. Investors are already pouring into Canadian bonds at a record clip, and now the aim is to channel some of that enthusiasm into more permanent flows—early indications over the past 18 months are mildly encouraging that FDI is indeed picking up.

The wave of positive vibes surrounding the summit did little to support equities or the Canadian dollar, however, as the latter dipped on the week to below 71.5 cents (or above $1.40/US$). Broad U.S. dollar strength in the wake of the FOMC spared few, including the yen. Stocks nearly fought to a draw amid the ongoing strength in energy prices, and the related sustained pressure on bond yields. Despite the lofty investment goals, markets were grounded by the mundane reality that the Bank of Canada may also have its tightening hand forced by persistently strong energy prices—although trade friction and uncertainty offer a strong counterpoint for now.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.