The Beverly Hillbillies famously called oil “black gold, Texas tea.” Jed Clampett may have gotten rich when crude started bubbling out of the ground, but for the Fed, the recent surge in oil is creating a very different problem, adding to inflation pressures that helped push the Fed to raise the fed funds rate by 25 basis points at its September meeting and project another increase before year-end.
Oil above $100 is not automatically a replay of the 1970s, but the longer prices stay elevated, the more likely the shock will broaden out to impact the prices of other goods and services and the Fed is now responding to that.
Chair Warsh specifically mentioned during his press conference that he would be watching the number of price categories that are trending above 3%. Implying that the breadth of inflation may be a key metric to watch moving forward.
The charts below help highlight the role that the Iran conflict has played in flipping the Federal Reserve from cuts to hikes in under a years’ time.
Figure 1. Oil is High, but This is Not the 1970s…Yet
Inflation-Adjusted West Texas Intermediate Crude Oil Price ($/BBL.) vs. U.S. Recessions
Sources: Federal Reserve Bank of St. Louis – FRED, Bureau of Labor Statistics, Bloomberg L.P., and Potomac. Data as of September 14, 2026. Note: Shaded regions denote periods of U.S. recession.
In inflation-adjusted terms, WTI has climbed back toward $100 per barrel, but it remains below the peaks reached around the major oil shocks of the past.
The U.S. is also much less energy intensive than it was in the late 1970s and early 1980s. Energy's share of consumer spending has fallen from 8.9% of total consumption in 1980 to just 3.6% in early 2026, reflecting the shift toward a more services-based economy and more energy-efficient transportation.
That should limit the direct hit to consumers compared with the 1970s, but the duration of the war matters. With oil prices staying higher for longer, it is becoming more difficult for the Fed to simply treat the move as a temporary geopolitical shock.
That can be seen clearly in futures-based expectations for Fed policy, with markets moving from pricing about three rate cuts by mid-2027 to now expecting a total of two to three rate hikes instead.
Though all eyes remain on Chair Warsh and the Fed, this is also playing out globally with the European Central Bank, Bank of Japan, and Reserve Bank of Australia already raising rates. Markets increasingly expect the Bank of England to follow.
Figure 2. Markets Have Rapidly Repriced Monetary Policy Expectations
Futures-Implied Number of Fed Rate Cuts or Hikes by 6/09/2027 FOMC Meeting
Sources: CME Group, Bloomberg L.P., and Potomac. Data as of September 16, 2026. All forecasts are expressions of opinions and are subject to change without notice and are not intended to be a guarantee.
As a result, oil has become increasingly correlated with U.S. Treasury yields and, in turn, the stock market. Recall that we have been pounding the table on stock/bond correlation for more than four years.
Correlation is not causation, of course, and rates are moving for plenty of reasons beyond oil, including fiscal deficits and Treasury supply. Still, the progression is notable. What began as an energy-market shock has increasingly become a bond-market and monetary-policy story. We raised this risk back in June in our piece, “Paying A Toll: The Hidden Cost of the Iran Conflict.”
Figure 3. Oil and Treasury Yields are Moving Together
Monthly Correlation Between Daily Changes in Brent Crude Oil and U.S. 10-year Treasury Yield
Sources: ICE, U.S. Department of Treasury, Bloomberg L.P., and Potomac. Data as of September 14, 2026. Note: The daily changes for Brent crude is % change and the daily change in yields is basis points.
The escalation can also be seen in the beta metrics. In January, a 1% daily move in Brent crude was associated with essentially no move in the 10-year Treasury yield. By August, the estimated beta had climbed to roughly 1.2 basis points for every 1% move in oil and is now running near 1.3 basis points in September.
Figure 4. The 10-Year U.S. Treasury is Becoming More Sensitive to Oil
Implied 10-Year Treasury Yield Move From a 10% Move in Brent Crude Oil
Sources: ICE, U.S. Department of Treasury, Bloomberg L.P., and Potomac. Data as of September 14, 2026. Note: Monthly regression beta of daily changes in the 10-year Treasury yield, in basis points, on daily percentage changes in Brent crude oil. Chart values multiply the estimated monthly beta by 10 to show the implied basis-point change in the 10-year yield associated with a 10% move in Brent.
That does not mean another 10% rise in oil will mechanically push the 10-year yield another 13 basis points higher. But the relationship may help explain why markets have become increasingly sensitive to daily moves in oil.
What began as an oil shock is increasingly looking like a rates shock.
The remaining question is whether today's rate hike, along with another increase later this year, will be enough to bring inflation back to the Fed's 2% target. If the Fed's projections are right, PCE inflation will have remained above its 2% target for roughly eight years before finally returning to target in 2029.
Jed Clampett got rich when the oil started flowing. We suspect Chair Warsh would be pretty happy to see more oil flowing again, too.
Weekly “Keeping it Strait” Highlights:
Oil prices continue to push higher with supply chain issues in the Middle East worsening amid attacks on other types of oil infrastructure. This has contributed to rising bond yields.
Despite the push higher in oil prices, U.S. economic data remains quite solid with U.S. consumer spending tracking around 4.1% annualized in the third quarter. August retail sales were an example of this ongoing strength.
The odds of Republicans maintaining control of the Senate has fallen below 50%. This may not hold, but based on betting market odds, the Democrats have a reasonable chance of taking control of the U.S. Congress.
