By Jarod Clark – June 25, 2025
Tensions in the Middle East have escalated once again, with military activity between Israel and Iran spilling over into broader regional volatility. The United States, long a strategic ally of Israel and an active presence in the region, now faces deeper military and economic entanglement.
While geopolitical conflict has always rattled financial markets, the implications for American borrowers—especially mortgage holders and those considering new loans—could be far-reaching. In this article, we break down what these developments could mean for interest rates in the short, medium, and long term.
The immediate response to geopolitical instability is typically a sharp movement in capital. Investors seek the relative safety of U.S. Treasury bonds, pushing yields lower. In theory, this can cause interest rates—particularly mortgage rates tied to the 10-year Treasury—to dip slightly.
However, the current backdrop is not typical. Inflation remains stubbornly above the Federal Reserve’s target, and the Fed has maintained a cautious stance on any rate cuts.
Key takeaway: If conflict causes oil prices to spike—due to disrupted flows through the Strait of Hormuz or Iranian supply constraints—this could re-ignite inflation fears, nudging rates higher instead of lower.
For borrowers: Expect short-term volatility, but not necessarily cheaper borrowing. Fixed mortgage rates may fluctuate week to week.
Should the conflict drag on, the economic narrative begins to shift. War in the Middle East—particularly with direct or proxy U.S. involvement—almost always affects energy markets. Crude oil above $100 per barrel is a likely scenario in a protracted conflict, which directly filters into consumer prices at the pump, in transport, and across supply chains.
If inflation re-accelerates as a result, the Federal Reserve will be forced to maintain or even raise interest rates, regardless of recession signals.
Scenario to watch: A second inflation wave triggered by commodity spikes, especially if paired with reduced consumer sentiment and sluggish wage growth.
For borrowers: Variable-rate loans may become more expensive. Homebuyers may delay decisions. Businesses could pause capital investment due to borrowing costs.
In the long arc of history, wars reshape economic alliances and priorities. A deeper, multi-year conflict could compel the U.S. to ramp up defense spending, impacting budget deficits. Simultaneously, increased risk premiums in global markets could mean higher base borrowing costs for years to come.
The Fed may eventually be forced to pivot not just for inflation control but to stabilize financial systems and credit markets.
Look for: New frameworks in U.S. monetary policy that account for defense risk, oil independence, and geopolitical debt risk pricing.
For borrowers: Interest rates may settle at a new “normal” higher than the 2010s-era lows, making refinancing or carrying long-term debt more expensive. But for savers and fixed-income investors, yields could finally offer meaningful returns again.
While the headlines focus on military actions and diplomatic fallout, the underlying currents for borrowers are deeply consequential. From mortgage applicants to business owners and student loan holders, the potential for rate volatility and inflation resurgence cannot be ignored.
As global tensions rise, it’s a good time to revisit your financial planning horizon—what you borrow today may feel very different next year.