Investors are betting the inflationary fallout from the war in Iran could force the US Federal Reserve to raise interest rates this year, in an abrupt turnaround in market pricing that has driven a sharp sell-off in short-term US Treasuries.
Traders in the futures market on Friday put the odds of a quarter-point interest rate increase by October at almost 50 per cent, a dramatic shift from prewar expectations of two or three cuts by the end of this year.
A rate rise, if it materialises, would be a major blow for President Donald Trump’s sustained campaign for lower borrowing costs. It is also a different view from that of Fed officials who on average expect a single quarter-point cut this year, despite chair Jay Powell’s acknowledgment after the central bank’s meeting this week that the conflict in the Middle East will push up inflation.