US stock futures slipped early Tuesday. Dow futures fell 0.6%, while S&P 500 and Nasdaq-100 futures each dropped roughly 0.5%, and the VIX jumped more than 7%.

The Federal Reserve opened its two-day policy meeting on Tuesday, with a rate decision due Wednesday at 2 p.m. ET, followed by an updated Summary of Economic Projections and a press conference from Fed Chairman Kevin Warsh at 2:30 p.m. Bond markets are already signaling how tense that debate has become.

A Milestone in the Bond Market

The 10-year Treasury yield briefly climbed past 5% on Monday, its highest level since October 2023, before paring the move later in the session. The 30-year yield touched 5.38%. The jump wasn’t limited to the US: 10-year yields in Australia and the UK also pushed above 5%, a global repricing that veteran Wall Street strategist Ed Yardeni linked partly to an unwinding of the yen carry trade as Japanese rates rise and the yen strengthens.

The Case for a Rate Hike

Behind the move is Friday’s inflation report. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index rose 0.4% in August on a seasonally adjusted basis, after a 0.1% increase in July, with the all-items index up 3.4% over the past 12 months. Core CPI, which excludes food and energy, rose 0.3% for the month and 2.4% year-over-year — both a touch hotter than economists expected.

The data pushed traders to reprice the odds of a hike this week. Fed funds futures tracked by the CME’s FedWatch tool put the probability of a rate increase Wednesday near 90%, while bettors on Polymarket see it closer to 80%. Goldman Sachs, which had expected the Fed to hold rates steady, revised its call to a hike after the report. “The report... pushed market pricing of a hike to nearly 90%, high enough that the FOMC will likely want to avoid the market reaction that would likely follow from remaining on hold,” Goldman Sachs chief economist David Mericle wrote.

Some strategists argue a hike now could calm the bond market rather than unsettle it. “A move this week would help restore the Fed’s inflation-fighting credibility and might ease some of the upward pressure on long-term yields,” Yardeni wrote — a notably different read than the soft-landing narrative that dominated market talk earlier this year.

Oil Adds Fuel to the Inflation Fire

Energy prices are complicating the picture further. Brent crude touched a session high above $109 a barrel on Monday and was trading near $107 on Tuesday, while WTI hovered around $102 to $103, after Yemen’s Houthi rebels launched a fresh attack on Saudi Arabia and Gulf Arab states postponed planned talks with Iran. Saudi officials had already blamed Iran-backed fighters in Iraq for an earlier strike on the kingdom’s east-west pipeline, a route that can carry as much as 4% of global oil supply. Iran’s own oil reserves and its regional alliances have made it a recurring flashpoint for energy markets this year, and traders are watching closely whether the disruption spreads.

Higher oil prices flow directly into gasoline and transportation costs — the same categories that pushed August’s CPI print higher — reinforcing the bind the Fed finds itself in just as it sits down to decide on rates.

AI Safety Fears Weigh on Tech

A separate worry is rattling technology stocks specifically. Anthropic CEO Dario Amodei published an essay this week warning about the pace of AI development, adding to a broader industry debate over whether AI is advancing too fast without adequate safeguards. The fallout weighed on Asian markets overnight, with futures for Japan, South Korea and Australia all pointing lower — a reminder that this year’s list of potential market-moving shocks extends well beyond interest rates and oil.

What to Watch for the Open

  • Fed decision: the FOMC statement is due Wednesday at 2 p.m. ET, followed by the dot plot and Chairman Warsh’s press conference at 2:30 p.m.
  • Treasury yields: watch whether the 10-year holds below 5% or pushes back through it once the Fed’s decision is known.
  • Oil: Brent above $107 and WTI above $102 keep inflation risk elevated; any escalation around the Saudi pipeline could push prices further.
  • Asia and Japan: the Bank of Japan also meets this week, giving global markets a second central-bank decision to digest alongside the Fed.
  • AI stocks: renewed safety concerns raised from within the industry itself could keep pressure on the sector regardless of what the Fed decides.