May 29, 2024
Economy

How an Escalation in Middle East Tensions Could Affect the U.S. Economy


Key Takeaways

  • Recent escalations in Middle East tensions won’t likely have a big impact on the U.S. economy, but that could change if oil prices move higher.
  • If oil prices rise to $100 per barrel or more, it could weigh down the entire economy by pushing up inflation.
  • Higher inflation would likely push back cuts to interest rates by the Federal Reserve.

Recent tensions in the Middle East may not create a big impact for the U.S. economy, analysts said, but that could change if things escalate and drive up oil prices

After Israel and Iran recently exchanged drone and missile strikes, the recent standoff may come to a close, Wells Fargo said in a commentary. Forecasters at the bank wrote the conflict was likely to remain “contained” and have minimal impact on the U.S. economy. Unlike when conflict over Israel’s offensive against Hamas created issues with attacks on shipping traffic, analysts said they didn’t expect the recent flare-up to create additional problems with cargo ships. 

“Under the assumption that conflict in the Middle East does not escalate, we do not anticipate any disruptions to global economic activity,” Wells Fargo wrote.

Rising Oil Prices Would Pose a Threat

While the U.S. economy’s strength may shield it from the direct impacts of the conflict, Oxford Economics’ Ryan Sweet pointed out that could change if oil prices moved higher than $100 a barrel.

“Tensions in the Middle East have, and will likely continue, to put upward pressure on global oil prices and the economic costs to the U.S. depend on how quickly and how high prices rise,” Sweet wrote. “So far, the tensions in the Middle East have not had a significant impact on the supply of oil, limiting the impact on prices.”

Israel’s response to Iran sent Brent crude oil prices higher by 2% on Friday. But at just over $87 on Monday, oil was trading lower by more than three dollars from its recent peak.

Oil prices would drive up what you pay at the pump, but that may not be the only way it affects your wallet.

Sweet calculated that the Consumer Price Index measure of inflation would rise by a half-percentage-point if oil prices were to jump to $100 per barrel. Meanwhile, $120 per barrel would push it higher by more than one percentage point, Sweet found.

Inflation has already been more stubborn than anticipated this year, and further growth could make it even harder for the Federal Reserve to cut interest rates soon. The policymakers have kept their influential fed funds rate at a more than two decades high in hopes of containing inflation, making borrowing costs on mortgages, credit cards and other loans expensive.



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