Escalating attacks in the Middle East and growing inflation concerns have intensified market expectations of interest rate increases, pushing bond yields higher. Market odds for a Federal Reserve rate hike at its September meeting have now risen to around 67%.
On Tuesday, the United States launched a new round of airstrikes targeting sites in Iran, which responded with retaliatory strikes, sharply escalating the conflict. After weeks of relative calm, any sustained resumption of hostilities could further drive up energy costs.
Meanwhile, President Donald Trump downplayed the likelihood of reaching an agreement, posting on Truth Social that he “isn’t trying to force Iran back to the negotiating table.”
“I don’t care one bit if they sign a deal that’s worthless to them,” Trump said. “I’m actually more satisfied with our current position,” the president added, reiterating his claim that Iran’s economy is on the verge of collapse.
Hours later, Iran’s semi-official Tasnim news agency reported that Iranian forces had carried out a “decisive operation” against U.S. bases in the region. Tehran stated it had fired missiles at a U.S. military base in Jordan and a facility in Bahrain. Kuwait reported intercepting incoming missiles.
U.S. Treasury Secretary Scott Biden told reporters at the G20 finance ministers’ summit in Asheville that Iranian leaders are “panicking” over their country’s economic problems and predicted they would eventually be ready to negotiate an end to the war.
Mounting pressures have led traders to increasingly bet that the Fed will raise rates at its meeting on September 15–16, with odds approaching 70%, and expect at least two more hikes by next March.
Federal Reserve Governor Michael Barr said Tuesday that the Fed should be prepared to raise interest rates if inflation does not subside. He warned that inflation pressures, having remained above target for over five consecutive years, could persist for a long time. This follows a split decision at the Fed’s July policy meeting, when three regional Fed presidents voted in favor of a rate increase.
