Fed Funds Rate Rises to 4%, Leaving Oil and Bitcoin Exposed

A hike that markets saw coming

The Federal Reserve has reversed course. On September 16, the Federal Open Market Committee raised the federal funds target range by a quarter point to 3.75%–4.00%. It was the Fed's first rate increase since 20231. All 12 voting members backed the move79. Since then, the story has moved from the decision to what comes next. Three things will shape it: oil prices driven by the war with Iran, a bond market pushing long-term yields above 5%, and a crypto market that reacts sharply to every change in rate expectations.

The hike did not catch markets off guard. Futures traders had put better than 90% odds on it1, and other trackers put the odds at roughly 83–85% in the days before the meeting3. The dissent had built over the summer. The committee held rates at 3.50%–3.75% from December 2025 through July, but the July vote was 9–3. Beth Hammack, Neel Kashkari and Lorie Logan dissented because they wanted a hike326. In September, those three got the rest of the committee to agree.

Chair Kevin Warsh explained the decision in terms of inflation. He said the committee needed to be confident that underlying inflation was falling toward target clearly and fast enough, and it was not1. He also cited tensions in the Middle East as one reason for the move1. Headline inflation was 3.4% year over year in August, while core inflation was 2.4%4. That gap shows how much of the problem comes from energy.

A dot plot that sees rates staying high

The new projections were more hawkish than the hike itself. The median official now expects the funds rate to end 2026 at 4.1%, which implies one more quarter-point increase this year6. Sixteen of the 18 participants expect another hike, and four expect two more16. Warsh has not submitted a projection since becoming chair1. The median shows no change in 2027, followed by cuts to 3.9% in 2028 and 3.6% in 20296. The longer-run estimate rose slightly to 3.2%6.

The outlook splits after this year. Eight participants see more hikes in 2027, six see no change, and four see cuts6. In practice, the committee agrees on the next step but not much beyond it.

The minutes, released October 7, help explain the hawkish turn. All participants supported the increase. Almost all said inflation risks were tilted upward, while labor-market risks had faded and were now roughly balanced2. A couple of officials said a higher rate would help stop price increases tied to energy disruptions and AI-related demand from spreading into broader, longer-lasting inflation2. Several said that even after the hike, policy was not restrictive or only mildly so2. Most officials thought another increase would probably be appropriate by year-end, though they stressed they would decide meeting by meeting4.

This is a Fed that does not see itself as tightening hard. It sees itself as catching up to a higher neutral rate while an energy shock tests whether inflation expectations stay anchored.

Oil is the main driver

The energy picture explains why the Fed moved. Crude is up about 70% this year, and US retail diesel has topped $6 a gallon for the first time, adding to voter frustration ahead of the November midterms15. The conflict is in its eighth month. Before the war, the Strait of Hormuz carried about a fifth of the world's oil and fuel supply20.

The past week showed how fast prices can swing. Brent closed near $100.32 on October 5 and fell toward $97–$98 the next day, as Gulf exports improved, emergency stock releases took effect and some of the war premium came out of prices13. Kuwait said it was producing at 75% of pre-war levels, and Saudi Arabia cut its November price for Arab Light sold to Asia. Analysts at ING read both moves as signs that supply was improving16.

The dip did not last. On October 8, Brent jumped about 4% to roughly $1041418. Reports put the intraday high near $105.3, and the move set off selling in bonds and stocks after a report that the White House had asked the Pentagon for options to strike Iran before the midterms11. At the same time, Hurricane Isaias forced the shutdown of about 63% of US Gulf of Mexico offshore oil production1218. Government data put the shut-in volume at about 1.3 million barrels per day20.

President Trump then said he would not order attacks on Iran before the election and described the talks with Tehran as productive. Prices eased early Friday1820. Iran's foreign minister said Tehran was reviewing a US response to a proposal that could reopen the Strait of Hormuz within seven days1220. Even so, Brent settled near $104.72 on Friday after new tanker attacks15. Washington also imposed new sanctions on Iranian oil shipping, targeting 17 vessels20.

Reports differ on what is driving prices. Some say better physical supply is gradually winning out over fear13. Others say supply worries are holding prices up despite those gains16. Prices back the second view. Goldman Sachs estimated that Brent carried a war-risk premium of about $22 a barrel in September12. In Europe, Dated Brent passed $135 on Thursday, its highest since April, which suggests the physical market is tighter than futures prices show15. For the Fed, the important point is that the oil shock is not easing in a way that would let policymakers ignore it.

Long-term yields are doing some of the Fed's work

The bond market has tightened financial conditions further on its own. Right after the September decision, the 10-year Treasury yield eased to about 4.95%3. By October 8, the 10-year had closed at 5.22% and the 30-year at 5.60%26. On October 7, the 10-year briefly approached 5.36%21. Earlier in October, yields were described as near their highest since 200230.

That move matters for the October 27–28 meeting. A weak September jobs report, with just 29,000 new payrolls and unemployment at 4.2%, sharply cut bets on a back-to-back hike27. The CME FedWatch probability of an October hike fell from about 70% to around 18%24. Another estimate put it at 23%, while markets still priced an 87% chance of at least one more hike by year-end28. After the minutes came out, the October hike probability was still around 18%21.

My reading: an October hold is the likely outcome, and December is the real decision. December brings new projections26. Higher long-term yields and weak hiring give the committee room to wait. The October 14 CPI report is the main risk to that view25. The PCE inflation report arrives October 29, a day after the decision27. That matters because, according to J.P. Morgan Asset Management, core PCE has been running meaningfully hotter than CPI6.

Bitcoin is acting like a rate-sensitive asset

Crypto has followed rate expectations closely. Bitcoin rose more than 12% over three weeks from mid-September and held around $86,000 on October 5. Spot bitcoin ETFs took in about $241 million that week, and falling odds of an October hike helped24. It then failed repeatedly to break resistance near $87,000–$88,00021, just below the 2026 opening price of roughly $87,50028.

The drop came on October 7. Bitcoin fell close to 3% to around $83,00022. One crypto outlet tallied about $550 million in long liquidations over 24 hours21, while Seeking Alpha put leveraged liquidations at $717 million22. The difference probably comes from different measurement windows and from counting only long positions versus all positions. Either way, it was a large, leverage-driven sell-off. Bitcoin traded near $82,000 on the morning of October 926 and around $83,000 on October 1023.

The Fed is not the whole explanation. The selling started before the minutes came out, alongside rising Treasury yields and a stronger dollar21. One analysis made a sharper point: September's weak payrolls should have supported the case for easing, but bitcoin fell anyway. That leaves room for the view that crypto traders are now reacting more to growth risk than to hopes for lower rates29.

The bottom line

Taken together, the picture is consistent. The Fed has started tightening again because an oil shock is threatening to make inflation stick. War headlines, sanctions and storms keep that shock going. Long-term yields have tightened conditions beyond anything the Fed has done directly. In this setting, bitcoin is trading as a high-beta rate asset rather than an inflation hedge. Until Brent falls back below $100 and stays there, or the Hormuz talks produce an actual reopening, chances of a rate cut will stay low.