Federal Reserve officials are raising alarms about the economic fallout from the Iran war, with concerns centered on how the conflict could simultaneously slow growth while pushing prices higher. Fed Vice Chair Philip Jefferson said sustained higher energy prices could worsen inflation and dampen consumer spending. These warnings reflect growing anxiety within the central bank about stagflation, the painful combination of stagnant growth and rising prices that plagued economies in the 1970s.
The economic pressure is already visible in consumer behavior. U.S. consumer sentiment hit a three-month low as war-related inflation fears spread through households. Stock market volatility is hitting higher-income Americans particularly hard, driving sharper drops in consumer confidence.
The Iran war is sending longer-term borrowing costs surging in ways that contrast sharply with past geopolitical crises. This week, three auctions of government debt showed weak demand for securities, with two-, five- and seven-year Treasury notes commanding lower prices than anticipated.
Mortgage rates have climbed even more sharply. The average 30-year fixed-rate mortgage was 5.99% at the end of February, just before the war started. It reached 6.62% by Thursday, putting new pressure on an already-faltering housing sector. Traders have piled into bets that the Fed's next move will be to raise interest rates rather than cut them, with futures now pricing in a 40% chance the policy rate will be higher at year-end than it is now.
The rise in borrowing costs reflects investor concerns about an unsustainable American fiscal position, rising inflation risk, and growing uncertainty about the war. Only about one-fifth of the rise in the 10-year yield is accounted for by investors anticipating higher inflation. The rest is explained by the "term premium," the compensation investors demand for tying up money for years amid heightened volatility and uncertainty.
Beyond financial markets, the conflict is disrupting physical supply chains worldwide. Fertilizer prices are climbing as a result of disruptions in the Middle East, putting global food supplies at risk. Diesel has climbed faster than gasoline this month, directly hitting businesses from brewers to trucking companies. It takes significant fuel to produce delicate crops like raspberries, which serve as a sensitive barometer as oil costs rise.
Asia's oil refiners are seeking alternatives to Middle Eastern benchmark crude prices as war-driven distortions fuel wild price swings. Beyond oil, the conflict is fueling fears of a helium shortage, a by-product of liquefied natural gas production critical for semiconductors, aerospace applications, and high-end medical equipment. Magnetic resonance imaging machines depend on liquid helium to cool their superconducting magnets, and a supply crunch could jeopardize diagnostic services.
The aviation crisis gripping Asia is threatening to intensify and spread to Europe and beyond as energy turmoil collides with seasonal travel demand. Japan announced it will relax rules from April to boost coal-fired power amid liquefied natural gas import risks.
The economic pain extends far beyond the United States. The European Union economy faces danger of enduring low growth combined with high inflation because of the war, according to the bloc's economy chief. The UK economy is showing first hits from the conflict, putting policymakers to the test.
Russia is abandoning plans for a sharp downgrade to its growth forecast as the war boosts its oil revenue. The commander of Sweden's armed forces said Russia is taking advantage of the conflict by "pouring" increased oil revenue into its war effort in Ukraine. Meanwhile, emerging economies' record debt spree has slumped into a freeze as the Iran war rocks markets.
The conflict has cooled early summer tourist interest in Cyprus and Greece. South Africa's rand is range-bound as Middle East conflict weighs on risk sentiment. African countries are coping with effects of the war through power rationing and diluting petrol supplies.
Rubio said the U.S. is still communicating with Iran through mediators rather than directly, and there is uncertainty about who is actually making decisions in Tehran.
Rubio stressed that the U.S. is determined to achieve all of its objectives in the war. He told G7 counterparts the U.S. does not need allies to help reopen the Strait of Hormuz but wants them to join a maritime task force to police the strait after the war ends. In a press gaggle after the meeting, Rubio said the U.S. expects the war to end within "weeks and not months."
The Europeans are skeptical of U.S. strategy. Rubio and his Group of Seven counterparts traded barbs over the wars in Iran and Ukraine, with Rubio noting the United States is constantly asked to help in Ukraine but did not get positive responses when the U.S. needed help in the Middle East.
Federal Reserve officials are raising alarms about the economic fallout from the Iran war, with concerns centered on how the conflict could simultaneously slow growth while pushing prices higher. Fed Vice Chair Philip Jefferson said sustained higher energy prices could worsen inflation and dampen consumer spending. James Cook, another Fed official, stated the balance of risks has shifted toward inflation due to the war. These warnings reflect growing anxiety within the central bank about stagflation, the painful combination of stagnant growth and rising prices that plagued economies in the 1970s.
The economic pressure is already visible in consumer behavior. U.S. consumer sentiment hit a three-month low as war-related inflation fears spread through households. Stock market volatility is hitting higher-income Americans particularly hard, driving sharper drops in consumer confidence. The S&P 500 is on course for its fifth straight week of losses and its worst weekly losing streak in roughly four years.
The Iran war is sending longer-term borrowing costs surging in ways that contrast sharply with past geopolitical crises. The 10-year Treasury note yielded 4.45% after the U.S. and Israeli attack on Iran, up half a percentage point from 3.96% just before the conflict began. This week, three auctions of government debt showed weak demand for securities, with two-, five- and seven-year Treasury notes commanding lower prices than anticipated.
Mortgage rates have climbed even more sharply. The average 30-year fixed-rate mortgage was 5.99% at the end of February, just before the war started. It reached 6.62% by Thursday, putting new pressure on an already-faltering housing sector. Traders have piled into bets that the Fed's next move will be to raise interest rates rather than cut them, with futures now pricing in a 40% chance the policy rate will be higher at year-end than it is now.
The rise in borrowing costs reflects investor concerns about an unsustainable American fiscal position, rising inflation risk, and growing uncertainty about the war. Only about one-fifth of the rise in the 10-year yield is accounted for by investors anticipating higher inflation. The rest is explained by the "term premium," the compensation investors demand for tying up money for years amid heightened volatility and uncertainty.
Beyond financial markets, the conflict is disrupting physical supply chains worldwide. Fertilizer prices are climbing as a result of disruptions in the Middle East, putting global food supplies at risk. Diesel has climbed faster than gasoline this month, directly hitting businesses from brewers to trucking companies. It takes significant fuel to produce delicate crops like raspberries, which serve as a sensitive barometer as oil costs rise.
The disruption of oil supplies is the largest in history, according to the International Energy Agency. Asia's oil refiners are seeking alternatives to Middle Eastern benchmark crude prices as war-driven distortions fuel wild price swings. Beyond oil, the conflict is fueling fears of a helium shortage, a by-product of liquefied natural gas production critical for semiconductors, aerospace applications, and high-end medical equipment. Magnetic resonance imaging machines depend on liquid helium to cool their superconducting magnets, and a supply crunch could jeopardize diagnostic services.
The aviation crisis gripping Asia is threatening to intensify and spread to Europe and beyond as energy turmoil collides with seasonal travel demand. Japan announced it will relax rules from April to boost coal-fired power amid liquefied natural gas import risks.
The economic pain extends far beyond the United States. The European Union economy faces danger of enduring low growth combined with high inflation because of the war, according to the bloc's economy chief. The UK economy is showing first hits from the conflict, putting policymakers to the test.
Russia is abandoning plans for a sharp downgrade to its growth forecast as the war boosts its oil revenue. The commander of Sweden's armed forces said Russia is taking advantage of the conflict by "pouring" increased oil revenue into its war effort in Ukraine. Meanwhile, emerging economies' record debt spree has slumped into a freeze as the Iran war rocks markets.
The conflict has cooled early summer tourist interest in Cyprus and Greece. South Africa's rand is range-bound as Middle East conflict weighs on risk sentiment. African countries are coping with effects of the war through power rationing and diluting petrol supplies.
Secretary of State Marco Rubio told G7 foreign ministers on Friday that the war will continue for another two to four weeks, marking the first time a senior U.S. official suggested the conflict would extend beyond the four to six-week timeframe President Trump has discussed since the war started. Rubio said the U.S. is still communicating with Iran through mediators rather than directly, and there is uncertainty about who is actually making decisions in Tehran.
Rubio stressed that the U.S. is determined to achieve all of its objectives in the war. He told G7 counterparts the U.S. does not need allies to help reopen the Strait of Hormuz but wants them to join a maritime task force to police the strait after the war ends. In a press gaggle after the meeting, Rubio said the U.S. expects the war to end within "weeks and not months."
The Europeans are skeptical of U.S. strategy. Rubio and his Group of Seven counterparts traded barbs over the wars in Iran and Ukraine, with Rubio noting the United States is constantly asked to help in Ukraine but did not get positive responses when the U.S. needed help in the Middle East.
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