The Fed Decides Tomorrow As The 10-Year Yield Tops 5%

The Federal Reserve began a two-day meeting on Tuesday, and the bond market did not wait for the decision. The yield on the 10-year Treasury note rose above 5% on Monday for the first time since 2007 before easing back, and oil held near $108 a barrel with Saudi Arabia's main pipeline alternative to the Strait of Hormuz still shut. Stocks slipped as both moves fed the same worry, that inflation is not finished and neither is the Fed.

Fast Facts

• OpenAI acquired Glass Imaging, a smartphone-camera startup founded by former Apple engineers and valued above $300 million (Read More)
• Software makers led by CrowdStrike and Palo Alto Networks pulled far ahead of chip stocks as investors reassessed how they want to own the AI trade (Read More)
• A Senate vote this week on the Clarity Act could rewrite how cryptocurrency is regulated in the United States (Read More)
• Home buyers are running into a new expense as "junk fees" creep into the mortgage process (Read More)
• NuScale Power moved closer to a deal that could reshape the small modular nuclear reactor industry (Read More)
• NextEra Energy reaffirmed its 2026 earnings forecast of $3.92 to $4.02 a share as its $67 billion merger with Dominion Energy advanced (Read More)

Global News

• The Bank of Japan is expected to deliver the fastest rate increase of its current cycle as pressure on the central bank builds (Read More)
• European shares fell as bank stocks tumbled on worries that rising oil prices will keep inflation elevated (Read More)
• Houthi forces said their airstrikes hit Yemen after Saudi Arabia vowed a "firm" response to attacks on its oil infrastructure (Read More)
• Chinese firms' share of global exports could reach 31% by 2035 as their overseas expansion deepens, Goldman Sachs estimated (Read More)

A Yield Above 5% Meets The Fed's Decision Day

The Fed's rate-setting committee opened a two-day meeting Tuesday, September 15, with the decision and Chair Kevin Warsh's press conference expected at 2:30 p.m. Eastern on Wednesday. Its target range for short-term rates has sat at 3.50% to 3.75% since a cut last December, untouched all year, most recently held on a 9-3 vote in July when three officials wanted an increase. As we covered last week, a hot August inflation reading pushed the odds of a quarter-point move, that is 0.25 percentage point, sharply higher. By Monday a market where traders bet on where the Fed will set its rate put the chance of a hike between 87% and 90%, and over the weekend both Goldman Sachs and Morgan Stanley switched their calls from a hold to a hike.

The clearest reaction was in the bond market. On Monday the yield on the 10-year Treasury note, the rate the government pays to borrow for a decade and the benchmark that sits under most mortgages, briefly rose above 5% for the first time since 2007 before slipping back. Treasury's official close for Monday put the 2-year at 4.65%, the 10-year at 4.97% and the 30-year at 5.34%, the highest borrowing costs in years.

Why does a yield the Fed does not directly set climb before the Fed even meets? The Fed controls one very short-term rate, and almost every other borrowing cost is built on top of it. When traders grow more convinced the Fed will raise that rate and keep it high to fight inflation, they demand more to lend for ten or thirty years, and longer-term yields rise on their own. That is what pushed the 10-year toward 5%. Because that yield sets the floor under home loans, the average 30-year fixed mortgage climbed to about 6.76% last week, up from 6.15% at the start of the year.

A chance near 90% is a bet, not a decision, and some prominent economists are urging the Fed to wait, warning that the economy may be weaker underneath than the headline numbers suggest. If the committee does raise rates, how the vote splits will matter as much as the move itself, because the number of officials who disagree is the clearest signal of where policy heads next. Warsh, who drew criticism for a vague July press conference that left investors guessing, gets a second chance to explain the Fed's thinking on Wednesday.

Sources: CNBC on the 10-year hitting 5% · MarketWatch on the Wall Street switch · MarketWatch on the case to wait · CNN on yields and mortgages · Axios on Warsh · U.S. Treasury · Rapunzl on the meeting opening · Rapunzl on last week's inflation print

Saudi Arabia's Backup Oil Route Stays Dark

Saudi Arabia's East-West pipeline, its main way to move crude to the Red Sea without sending it through the contested Strait of Hormuz, stayed shut on Tuesday after last week's drone attack, while Iran-aligned Houthi forces reported new airstrikes as the kingdom vowed a firm response. Oil kept last week's jump: Brent, the global benchmark, traded near $108 a barrel, and the heads of major oil companies, including Chevron's Mike Wirth, warned that a genuine fuel crisis has arrived, even as Trump administration officials called the disruption temporary. Crude eased only slightly from Monday's highs as traders waited to see how much supply the outage actually removes.

The pipeline is the story we have tracked for two weeks, and the shutdown matters because it was Saudi Arabia's insurance policy, the route it kept in reserve for exactly the moment the Hormuz passage came under threat. With that backup offline and Houthi forces pressing on the Red Sea's southern gate, a large share of the kingdom's export capacity is exposed to the same conflict all at once. The cost is already landing at home: the national average for diesel hit a record near $6.23 a gallon and regular gasoline averaged about $4.32, according to AAA, and fuel is one of the few prices a family sees change from week to week.

Here is why a pipeline in the Arabian desert reaches a kitchen table in Ohio. Oil is a direct input into the price of almost everything that has to be grown, made or moved, so when crude jumps it pushes up the inflation figures the Federal Reserve watches most closely. That is the thread tying these first two stories together: the same oil spike that raises the number on the gas-station sign also strengthens the argument for keeping interest rates high, which is why Monday's move in crude showed up so fast in the bond market.

Sources: WSJ on the fuel crisis · WSJ on Tuesday's oil trade · Al Jazeera on the Yemen strikes · NBC News on record diesel prices · Rapunzl on last week's pipeline attack

The AI Scare Splits The Market In Two

A day after Anthropic chief executive Dario Amodei's weekend call to slow the race to build ever more capable AI, the damage in the market turned out to be uneven rather than broad. Chip stocks took the worst of it, with Nvidia down about 3%, Intel off roughly 7% and a widely watched basket of semiconductor stocks falling around 6%, while software companies held up far better and, measured against chips, outran them by the widest margin on record. Major U.S. indexes slipped only modestly, which is why a scare that started the day looking like a rout ended it looking more like a rotation.

The split is really an argument about how fast to build, and on Monday it went public. President Trump phoned Nvidia chief Jensen Huang during an on-stage interview to call fears about AI a hoax, and Senate Majority Leader John Thune said Congress has a role to play but urged a light touch. What investors are trying to price is whether the enormous spending on chips, data centers and power that has driven much of this year's rally keeps running at the same pace, or whether the industry's own leaders talking about a slowdown is the first real sign that it will not. As we noted yesterday, that question, not any single earnings report, is what is moving these stocks.

Sources: CNBC on Trump's call with Huang · MarketWatch on software versus chips · WSJ on Wall Street's response · Axios on Thune and Congress · Rapunzl on Monday's AI selloff

What To Watch

The week belongs to the Federal Reserve. Policymakers are meeting Tuesday and Wednesday, September 15 and 16, with a decision and a press conference from Chair Kevin Warsh expected at 2:30 p.m. Eastern on the 16th, and market pricing implies roughly an 87% to 90% chance of a quarter-point increase. The Bank of England and the Bank of Japan are each expected to announce their own rate decisions within a day of the Fed's, part of why the pound and the yen have been moving.

Earnings are light early in the week. Trip.com, the Chinese travel company, is expected to report after Tuesday's close, with an average estimate of $0.84 a share against $0.90 a year earlier. Lennar, the homebuilder, is expected after Wednesday's close, a timely read on how a near-7% mortgage is landing on housing. VinFast and Hub Group are expected Thursday.

Further out, the government's estimates of economic growth, personal income and corporate profits are all expected September 30, the next real test of whether the economy is as sturdy as the case for higher rates assumes.

The Classroom Takeaway

When a decision the Fed has not made yet can push borrowing costs to their highest in nearly two decades, it is worth understanding how one central bank's rate ripples out to mortgages, savings and the cost of a loan. You can sit in the chair yourself and see how those trade-offs play out in our Run the Fed simulation.