U.S. stocks sink on fears the war with Iran will keep interest rates high

U.S. stocks are sinking Friday as hopes wither on Wall Street for a possible cut to interest rates by the Federal Reserve this year because of the war with Iran.

The S&P 500 fell 0.8 per cent and was on track for a fourth straight losing week, its longest such streak in a year. The Dow Jones Industrial Average was down 228 points, or 0.5 per cent, as of noon Eastern time, and the Nasdaq composite was 1.1 per cent lower.

Stocks sank under the weight of leaping yields in the bond market. Higher yields will make mortgage rates and other borrowing more expensive for U.S. households and companies, slowing the economy, and grind down on prices for all kinds of investments. Treasury yields have been jumping since the war began because it could cause a long-term spike in oil and natural gas prices that drives up inflation.

Worries have gotten so high that traders have canceled nearly all their bets that the Federal Reserve could cut interest rates this year, according to data from CME Group. Some even think the Fed could raise rates in 2026, which was a nearly unthinkable scenario before the war began.

“I think it would be market shaking,” Ann Miletti, head of equity investments at Allspring Global Investments, said about rate hikes. But she also said that if oil prices stay high for a long time, they would likely drag so much on the economy that the Fed would not consider raising rates.

Lower interest rates would give the economy and investment prices a boost, and they’re something U.S. President Donald Trump has angrily been calling for. Before the war with Iran, traders were betting heavily that the Fed would cut rates at least twice this year.