Will Middle East Tensions Push Rates Higher?

Will Middle East Tensions Push Rates Higher?

October 26, 2023

The Fed’s ongoing pledge of “higher interest rates for longer” has rattled financial markets and raised the cost of everything from mortgages to credit cards.

Now adding to tensions are the recent events in the occupied territories of Israel and Palestine which, in addition to a grievous loss of life, immediately pushed oil prices higher.

Higher oil prices could translate to inflation, which may give the Fed another reason to keep rates higher for longer.

But are rates high enough? In the accompanying chart, you can see that the current rates on the 10-year government bond are higher than most of Europe, where inflation is higher than the U.S.1

Remember, the Fed is trying to “thread a needle” by raising interest rates to slow the economy–and reduce inflation–without causing a recession.

So, while you may be starting to experience some relief from inflation at the grocery store, if you’re shopping for a new car, expect to find the cost of financing is higher. Those higher rates may prompt some to hit "pause" on that new car, which is exactly what the Fed wants.

I’m not certain what comes next–or to what extent the heartbreaking geopolitical events will influence markets. But I do know that the Fed may have a few more things to consider at its upcoming meeting ending on November 1, 2023.

1. Reuters.com, September 5, 2023 “Europe faces dirtier inflation fight than US”