Iran War Triggers Rate Hike Bets as Inflation Soars

Moody's Analytics Chief Economist Mark Zandi has warned that the ongoing Iran war is fueling inflation and pushing long-term borrowing costs higher. This shift in investor sentiment means they are now anticipating possible Federal Reserve rate hikes, rather than expecting cuts.

The war has had a significant impact on interest rates, with long-term rates climbing 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 has risen to nearly 4.75% as of last Friday.

Zandi attributed this rise in interest rates to the Iran War, stating that it has fueled inflation and caused investors to change their expectations about Fed rate policy. He also noted that the war has added $21.3 billion to U.S. gasoline costs over six weeks.

Other economists have warned that the war's inflationary effects could persist even after the conflict ends. The IMF has raised its 2026 U.S. inflation forecast to 3.2% from 2.5%, while the OECD lifted its forecast to 4.2% from 2.8%. Energy costs, in particular, have jumped 10.9%, with gasoline surging 21.2%.