Oil Rally Forces Markets to Rethink Rate Cuts as Neutral Rate Jumps

Markets are adjusting their expectations for US Federal Reserve rate cuts due to rising oil prices and stronger growth signals. The sharp increase in oil has pushed investors to rethink how long central banks may keep policy tight, leading them to price in higher interest rates for longer.

No rate cuts are forecast before mid-2028, according to market expectations. This is reflected in the rise of bond yields, with two-year bond yields increasing by 55 basis points this month and thirty-year bond yields rising by 25 basis points in September.

The Reserve Bank of Australia is expected to raise rates on Tuesday to their highest level in 15 years, making it harder for central banks to look past a temporary price shock. Central bankers are increasingly talking about a new, higher neutral rate, the level that neither stimulates nor restrains the economy.