Stocks Rally Into Fed Week as Oil Retreats, But AI Safety Fears Cloud Weekend

US stocks closed higher on Friday as retreating oil prices offset stronger-than-expected consumer inflation data. The S&P 500 climbed 0.86% to 7,656.98, the Nasdaq gained 0.96% to 26,333.04, and the Dow Jones Industrial Average rose 0.98% to 52,573.29. Nine of eleven S&P 500 sectors advanced, led by communication services (+1.35%) and consumer discretionary (+1.13%).

The rally followed a CPI report showing core consumer prices rose 0.3% month-over-month in August, above expectations. Interest rate futures now reflect a nearly 90% probability that the Fed will raise rates at its policy meeting this Wednesday, up from 72% the day before. Ten-year Treasury yields approached the closely watched 5% level as traders priced in two hikes by year-end.

Despite Friday’s gains, the S&P 500 dipped 0.8% for the week and the Nasdaq lost 0.7%. The benchmark is now trading at 19 times forward earnings — its cheapest since April 2025, when Trump’s “Liberation Day” tariffs rattled markets. The VIX fell 2 points to 15.88.

Federal Reserve Chairman Kevin Warsh faces overwhelming pressure to raise interest rates at this week’s Sept 15–16 meeting after the August CPI data. The core consumer price index rose 0.3% from July, bolstering the argument that the Fed must act to curb persistent price pressures. Much of the rise was driven by a record increase in wireless telephone services, though analysts said the Fed couldn’t afford to keep holding rates on the promise of future improvements.

“For the Fed, it is time to put up or shut up,” wrote Omair Sharif of Inflation Insights. Several economists, including those at TD Bank and JPMorgan Chase, changed their calls to anticipate a hike after the release. The University of Michigan’s latest survey showed one-year inflation expectations jumping to 4.6% from 4% a month earlier, and for the first time since 2023, a majority of consumers expect interest rates to rise.

A rate hike could draw the ire of President Trump, who has not stopped calling for lower rates and last week threatened to cut off trade with certain countries if the Fed didn’t cut. If the Fed does move, some economists now expect more than one or two hikes, with RSM’s Joseph Brusuelas arguing the Fed needs to “remove the three rate cuts implemented in late 2025.”

Saudi Arabia closed its East-West pipeline — a critical 1,200km conduit carrying 4–5 million barrels per day across the Arabian Peninsula — after multiple drone attacks launched from Iraq. The pipeline had served as the main route for Middle East oil exports since the Strait of Hormuz was largely shut by war, and its closure threatens to send energy prices even higher.

In a dramatic escalation, Houthi forces seized the strategic island of Perim at the mouth of the Bab el-Mandeb Strait, potentially extending their control over Red Sea shipping. Saudi crude exports slumped to just 3 million barrels a day in August, the lowest in more than three decades. Crown Prince Mohammed bin Salman phoned Trump to ask for US military help, but was told Washington would not intervene directly for now.

Brent crude settled near $105 a barrel on Friday after almost reaching $110 on Thursday. Oil was up around 9% for the week. US retail gasoline is hovering above $4/gallon while diesel has surged to a record $6/gallon. Gulf states will meet in Oman on Monday to discuss the Strait of Hormuz, though a senior Iranian official played down the chances of a breakthrough.

In a weekend development that will likely weigh on Monday’s open, Anthropic CEO Dario Amodei issued a lengthy blog post calling on the AI industry to slow development of its most advanced models. OpenAI’s Sam Altman swiftly endorsed the proposal, pledging to adopt independent evaluators with “employee-like access,” while Elon Musk wrote simply, “Dario is right.”

Altman also told Fortune that OpenAI will not go public in 2026, saying it would be “ill-advised” given safety concerns. He warned that even a 10% risk of AI-driven extinction by decade’s end was “unacceptable.” Nasdaq weekend CFDs were trading down more than 1% on the news, with semiconductor and AI-linked stocks expected to bear the brunt of any initial selloff.

Beyond the Fed, the Bank of Japan is expected to raise rates by 25 basis points to 1.25% on Thursday — a level not seen in more than three decades. Swaps already fully price rates reaching 1.5% by January, with the October and December meetings considered live. The yen’s recent rebound from a four-decade low has eased pressure, though investors remain sensitive to any renewed unwinding of yen-funded carry trades.

Oil is not the only fire central bankers are fighting. European natural gas prices are at their highest since late 2022, with winter approaching and storage at 15-year lows for this time of year. Record heatwaves have devastated crops, igniting food inflation fears, while copper has raced to record highs near $15,000/tonne on AI infrastructure and power grid demand. Brent physical prices are above $120 and jet fuel is nearing April’s peaks.