Q3 review: Record diesel, rising rates

The U.S. economy showed resilience last quarter, but the picture wasn’t all rosy. Hiring slowed sharply, and while consumer spending picked up, the U.S.-Iran conflict drove fuel prices higher and kept inflation elevated. In September, the Fed raised rates for the first time since 2023.

 

Stocks ended the quarter modestly higher, even as the 10-year Treasury yield hit its highest level since 2007, raising borrowing costs and testing the lofty valuations behind the AI rally.

 

The overview below examines how energy prices, inflation, and Fed policy shaped the quarter’s results.

 

Major U.S. Stock Indexes

• The S&P 500 climbed 2.03%.
• The Nasdaq 100 edged up 0.44%.
• The Dow Jones Industrial Average slid 2.70%.

Diesel Fuels the Economy

 

The U.S.-Iran conflict made diesel the quarter’s most telling price. Diesel powers the trucks, trains, ships, and farm equipment that keep the economy supplied, and late in the quarter, it topped $6 a gallon nationally for the first time. The surge reflected more than expensive crude. Ukrainian strikes on Russian refineries, Iranian attacks on tankers, and Moscow’s export ban sharply cut global diesel supply.

 

Unlike gasoline, diesel costs are built into nearly everything consumers buy. Businesses can absorb higher fuel bills only for so long before passing them on through freight charges, food prices, and delivery fees. Consumers kept spending, but they grew more anxious about prices, and the diesel spike may help explain why. Even households that never buy a gallon at the pump are paying for it at the checkout.

 

Inflation’s Energy Problem

 

Energy costs kept inflation from cooling enough to satisfy the Fed under Chair Kevin Warsh. Set food and energy aside, and the picture looked steadier. Underlying price increases held roughly level for months, a sign that the broader economy wasn’t overheating. But with demand holding up and fuel costs still climbing, overall inflation remained well above the Fed’s 2% goal. By late summer, policymakers concluded that waiting carried more risk than acting.

 

A Small Rate Increase, a Louder Message

 

At its September meeting, the Federal Reserve hiked rates for the first time in three years, moving the benchmark federal funds rate to 3.75%-4%. In anticipation of this, bond investors pushed long-term Treasury yields to levels not seen since 2007 the day before the decision, lifting borrowing costs across the economy. The hike itself was modest, but what unsettled investors was the signal behind it. Policymakers indicated that another increase could come before year-end and that rates would likely stay high through 2027. 

 

For savers, this is welcome news. Money market funds, CDs, and short-term bonds now pay noticeably more. Borrowers are facing the opposite, as mortgages and car loans grow costlier.

 

Key Q4 Events

 

The Fed’s late-October and early-December meetings are among the quarter’s biggest events, and monthly data releases will continue to offer valuable insights into how inflation affects consumers.