Washington — Jump in Gas prices The war in Iran has had another effect that may also affect the finances of many Americans: rising interest rates.
Long-term interest rates have risen rapidly since the war began on February 28, pushing up the cost of deposits. Mortgage loansAuto loans and business borrowing. With inflation measures likely to rise in the coming months, so does the possibility of interest rate cuts this year by the Federal Reserve Fading. Instead, Wall Street investors see the odds of a real interest rate hike rising instead.
The fact that raising interest rates has become a plausible scenario — even though most economists still see it as unlikely — represents a sharp shift from earlier this year, when the debate was more focused on the global economy. How many times Whether the Fed will cut its key interest rate is not a question of whether it will do so at all.
“We believe the cuts are overdue, not derailed,” Krishna Guha, head of economics at investment bank Evercore ISI, wrote on Tuesday. “The question is: Will it be postponed to September, will it be postponed to December, or will it be postponed indefinitely” until 2027?
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in an interview with The Associated Press on Monday that if inflation rises while the unemployment rate remains stable, and Americans show signs of anticipating higher inflation in the future, “there are clear rules of the game, which is that rate increases should be on the table.” Goolsby participates in meetings of the Federal Reserve’s interest rate-setting committee, but is not one of 12 voters this year.
Wall Street investors no longer expect any interest rate cuts this year, according to futures prices tracked by CME Fedwatch. The odds of a rate hike by October have risen to nearly 25%, from zero just a week ago.
Mary Daly, president of the Federal Reserve Bank of San Francisco, said late Monday: Written statement The uncertainty created by the Iran war means “there is no single more likely path” for the Fed’s key interest rate, suggesting the Fed could move up, down or remain unchanged in the coming months.
The war created a difficult dilemma for the Fed. Most economists expect the conflict to exacerbate inflation by raising gas prices. But when gas prices rise too high — say $5 a gallon for an extended period — it may force consumers to cut back on their spending elsewhere to offset higher gas costs, slowing the economy and potentially raising unemployment rates.
“Although more net inflation would likely mean higher rates,” said Jonathan Pingel, an economist at UBS. “On the other hand, an energy price shock will be a headwind to growth.”
The Fed typically raises interest rates — or keeps them unchanged — to combat inflation, while it often lowers interest rates to stimulate the economy and reduce unemployment.
When gas prices rise, the standard central bank response is to look beyond the increase in inflation that results because it is often a temporary phenomenon. In this case, the Fed could cut interest rates if it began to become concerned about worsening unemployment.
However, Federal Reserve Chairman Jerome Powell said in a press conference Last weekHe said it’s more difficult to assume the impact will be temporary now that inflation has been above its 2% target for five years, roiling the economy for many Americans.
For now, many Fed officials are more focused on the risk of higher inflation, suggesting that the Fed will keep its key interest rate unchanged in the coming months. Economists at UBS expect inflation, according to the Fed’s preferred measure, to jump to 3.4% this month and end the year at 3%, above the Fed’s 2% target.
The unemployment rate is “low and fairly stable,” Goolsby said. “So that’s not as far off target as inflation is right now. Now, having a second inflation shock makes me more worried on the inflation side than I am on the unemployment side right now.”
When investors expect the Fed to keep its key short-term interest rate higher for longer, long-term interest rates rise. The yield on 10-year Treasury bonds rose from just under 4% on February 27, the day before the Iran war began, to nearly 4.4% on Wednesday.
Mortgage rates closely track rates on 10-year and 30-year fixed mortgages, and now average 6.22%, according to mortgage giant Freddie Mac, up from just under 6% before the war.