MARKETS HEDGING AGAINST GEOPOLITICAL RISKS | https://markets.businessinsider.com/

 

The crisis in the Middle East could fuel a flare-up in inflation and hasten an economic slump for the US

George Glover 

Oct 10, 2023, 1:59 AM PDT

People try to extinguish a fire in Ashkelon, Israel, after Hamas launched a series of surprise attacks on October

Ahmad Gharabli /AFP via Getty Images

• Oil benchmarks jumped after Hamas attacked Israel, while stocks slipped in an initial reaction.
• Iran becoming embroiled in the crisis would be bad news for the US economy, according to analysts.
• Crude prices would soar in that scenario, undermining the Fed's inflation fight and dragging down growth.

Iran becoming embroiled in the crisis gripping the Middle East could have disastrous knock-on effects for the US economy, analysts have warned.

Wall Street is fretting that Hamas' shocking attack on Israel Saturday will spiral into a full-blown conflict between Tel Aviv and Tehran that could drive up oil prices, unravel the Federal Reserve's fight against inflation, and drag down GDP growth.

Here's what you need to know. Oil prices could surge. The Brent and West Texas Intermediate crude benchmarks jumped as much as 5% when markets opened Monday, while stocks slipped as investors pivoted to safe haven assets like gold and the dollar in a bid to hedge against heightened geopolitical risk.

Inflation might flare up Over the past 18 months, the Fed has raised interest rates by 525 basis points in a bid to crush US inflation, which has cooled from forty-year highs toward the central bank's 2% target rate.I

• Inflation jumping would increase the likelihood that the Fed feels compelled to bring in more rate hikes, with the prospect of higher borrowing costs already weighing on stocks and fueling a historic rout in the US Treasury bond market.
• But a dramatic rally in oil could spark a flare up, because the price of crude dictates the cost of everyday goods like gasoline.

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