If you've been wondering why your borrowing costs keep creeping up, Mark Zandi has a one-word answer: Iran.

The Moody's Analytics chief economist took to X on Sunday to lay out a pretty straightforward chain of events. The Iran war is pushing up long-term interest rates, which are now at levels we haven't seen since before the Global Financial Crisis. And the culprit, in his view, is pretty clear.

"Long-term interest rates are on the rise, and about as high as they've been since prior to the Global Financial Crisis," Zandi wrote. "At the top of the list of reasons why is the Iran War."

Before the conflict, the 10-year Treasury yield was sitting below 4%. As of last Friday, it was hovering near 4.75%. That's a big move, and it's got investors rethinking their bets on the Federal Reserve.

"The war has fueled inflation, causing investors to shift from expecting the Fed to cut rates this year to expecting it to raise them," Zandi said.

That's a notable shift. Just a few months ago, the market was pricing in a series of rate cuts. Now, the conversation has flipped to the possibility of hikes.

Zandi didn't stop at diagnosis. He also offered a prescription for what needs to happen to avoid the worst outcomes.

"But barring that vexed move, oil needs to flow through the Strait of Hormuz, the Fed needs to give investors some sense of what it is thinking as it sets policy, and lawmakers need to address the nation's darkening fiscal outlook," he said.

That last part, about the fiscal outlook, is worth dwelling on. The government's borrowing needs are already massive, and higher interest rates only make the debt service more expensive. It's a feedback loop that doesn't end well if left unchecked.

Inflation Pressures Build

Zandi isn't the only one sounding the alarm. Kevin Hassett, a former White House economic adviser, has noted that fuel and grocery prices remain elevated because of the war, though he thinks fuel costs could ease once the Gulf situation is resolved. He described the U.S. economy as being in a "liftoff stage," pointing to strong investment, low job losses, and rising productivity.

But even if the conflict ends soon, economists warn that the inflationary effects could linger. Higher fuel prices and disruptions around the Strait of Hormuz have pushed up energy and fertilizer costs. Zandi estimates the war has added $21.3 billion to U.S. gasoline costs over the past six weeks alone.

Treasury Secretary Scott Bessent has also weighed in, saying economic growth could slow depending on how long the war lasts. The numbers back that up: the IMF raised its 2026 U.S. inflation forecast to 3.2% from 2.5%, and the OECD went even further, lifting its forecast to 4.2% from 2.8%.

March CPI Shows the Impact

The inflation data is already reflecting the war's toll. U.S. inflation rose 0.9% in March, pushing annual CPI inflation to 3.3% from 2.4% in February. The main driver? Energy prices, which jumped 10.9% for the month, with gasoline surging 21.2%.

Core inflation, which strips out food and energy, rose just 0.2% monthly. That suggests the inflation shock is still concentrated in energy, which is some comfort, but it also means the Fed can't just look past the headline numbers.

For investors, the takeaway is that the path forward for rates is murkier than it seemed. The Fed's next moves will depend on how the war evolves, whether oil keeps flowing, and whether lawmakers get serious about the deficit. Zandi's message is clear: the longer these issues fester, the more painful the adjustment will be.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by MarketDash editors.