Why the Fed is expected to hike even though it can't touch oil pricesThe Federal Open Market Committee meets on September 15 and 16, with a decision due Wednesday afternoon under Chair Kevin Warsh. Markets are pricing a high probability of a quarter-point increase, which would take the federal funds rate to a range of 3.75% to 4.00%, the first hike of this cycle. The driving force behind that shift in expectations is energy. Oil and diesel prices have risen sharply this year amid the ongoing disruption to Middle East supply routes due to Trump's war, and that cost pressure has been feeding directly into inflation readings.---Earlier:Trump-Iran war: Costco nearly doubles motor oil price and imposes purchase capsWSJ: Oil executives warn a global fuel crisis has arrived as Hormuz closure bites---Here's the part that trips a lot of people up: the Fed raising interest rates does nothing to bring the price of diesel down. Diesel costs more because of a physical supply problem, tighter crude availability, refinery disruptions, and shipping risk through contested waterways. Interest rates don't drill more oil, unload more tankers, or repair a damaged pipeline. If the Fed's tool doesn't touch the actual cause, why hike at all?The answer lies in what a rate hike is actually built to do. It doesn't fix the supply side, it works on the demand side. Diesel prices don't stay contained to trucking, they filter into the price of nearly everything that moves by road or rail; groceries, retail goods, construction materials. Left unchecked, that kind of broad-based cost pressure can start showing up in wage demands and pricing decisions across the economy, turning a one-off energy shock into something more persistent. Central banks call this a second-round effect, and it's the thing they're actually trying to prevent.By making borrowing more expensive, a rate hike slows spending, on credit cards, mortgages, business investment, hiring. That's a blunt instrument, and it doesn't discriminate between energy-related spending and everything else. But if the Fed can cool overall demand growth enough, it can offset some of the upward pressure that expensive diesel is putting on the broader price level, even without ever lowering the price of diesel itself.What would change this picture: if oil and diesel prices ease on their own, through a resolution of the supply disruption or a demand slowdown elsewhere in the global economy, the pressure driving this hike would ease with it, and further tightening would look less necessary. Conversely, if energy costs keep climbing and start showing up in wage and pricing expectations more broadly, the case for additional hikes beyond September would strengthen.The practical takeaway: a Fed hike aimed at an oil-driven inflation problem is not a fix for that problem, it's an attempt to stop the problem from spreading. Understanding that distinction is the difference between expecting a rate decision to move gas station prices, and understanding what it's actually trying to prevent. This article was written by Eamonn Sheridan at investinglive.com.