Fed Rate Hike Looms as Oil Prices and Inflation Concerns Weigh

The Federal Reserve is set to raise interest rates today, with investors pricing in more than 90% odds of a quarter-point increase. The 10-year Treasury yield has pushed above 5%, its highest level since 2007.

While the market expects a hike, there are three important storylines that will hinge on messaging from the Fed and its new chair, Kevin Warsh. One key issue is whether stocks can withstand rising bond yields, with the equity-risk premium at its lowest since 2002. This means safe-haven Treasurys are offering increasingly appealing returns relative to riskier stocks.

Another storyline revolves around a potential Fed independence test. President Trump has expressed his preference for lower borrowing costs, and will likely express his displeasure again if the Fed raises rates. The pressure is already public, with Trump appointee Stephen Miran arguing on CNBC that a hike would be a mistake.

The third key issue is oil's complicated picture. Higher crude prices are pushing up inflation concerns and making it harder for the Fed to declare victory. Investors will be hanging on every word from officials as they determine whether the surge is a temporary supply shock or a longer-lasting inflation threat.