Iran War Sparks Inflation Fears, Pushes Long-term Interest Rates Higher

Moody's Analytics Chief Economist Mark Zandi warned that the ongoing Iran war is fueling inflation and pushing long-term borrowing costs higher, prompting investors to shift from expecting Federal Reserve rate cuts to anticipating possible hikes. This shift in expectations comes as long-term interest rates have climbed to levels not seen since before the Global Financial Crisis.

According to Zandi, the 10-year Treasury yield was below 4% before the war but had risen to nearly 4.75% by last Friday. The economist attributed this increase to the Iran war, saying that it has fueled inflation and caused investors to reassess their expectations of Fed rate actions.

Zandi emphasized that addressing the nation's darkening fiscal outlook is crucial in mitigating the effects of the war on inflation and interest rates. He noted that lawmakers need to take action to address the nation's fiscal challenges, which he believes are being exacerbated by the conflict.