War in the Middle East: Why the Fed could change its strategy because of the Israel war

The war in Israel is keeping the world population on tenterhooks. In addition to political concerns, global economic concerns are also flaring up. The conflict in the Middle East could also influence the Fed’s next steps.

• Long-running conflict in the Middle East is fueled by rocket attacks on Israel
• Israel war could have consequences for the oil market
• Israel-Hamas conflict could impact Fed’s next steps

Rocket attack on Israel

On October 7th there was a major attack on Israel, the origins of which, however, lie further in the past. As the Frankfurter Rundschau reports, among others, Israel is at war with the militant Palestinian organization Hamas following massive rocket attacks from the Gaza Strip, according to Head of State Benjamin Netanyahu. After the riots, Netanyahu declared: “The enemy will pay an unprecedented price.” However, the conflict between the two parties is not new. There have been tensions between the two warring parties for several decades. In the Six-Day War of 1967, Israel conquered, among other things, the West Bank and East Jerusalem. However, the Palestinians claim these areas for the establishment of an independent state of Palestine. In 1987, shortly after the start of the first Palestinian uprisings against Israel, known as the Intifada, Hamas was founded. This group aims to destroy Israel and establish an Islamic state of Palestine. The name “Hamas” is an abbreviation of the Arabic name for “Islamic Resistance Movement,” with the word itself meaning “zeal” or “fighting spirit.”

However, in its early years, Hamas was not militarily oriented but operated as a charitable organization. For example, she supported schools and other social institutions, which gained her widespread support among the needy population of the Gaza Strip. However, Hamas is now classified as a terrorist organization by the EU, the USA and Israel. The Essedin al-Qassam Brigades, Hamas’ armed force, has claimed responsibility for the attack on Israel on October 7, 2023.

Impact on the global economy

As the tagesschau reports, the renewed conflict in the Middle East is causing growing uncertainty in the market. However, while the economic consequences would still be manageable, it is the high oil price that is particularly worrying market observers. “The oil market has reacted because this conflict is of course taking place in a region with important oil-producing countries. The risk that many traders are currently discussing is the question of whether Israel could possibly retaliate directly against Iran, which is suspected of being behind the Hamas attacks “explains Moritz Krämer, oil expert at Landesbank Baden-Württemberg (LBBW). Such a scenario would spread the conflict to the entire Middle East region. This could lead to naval blockades disrupting trade in the Strait of Hormuz, which is one of the main arteries for global oil transport. In addition, other trade barriers would also be conceivable that could weaken the economy in Israel’s neighboring countries. This is one of the reasons why Jordanian and Egyptian government bonds fell sharply in value after the weekend.

Israel war could change Fed strategy

And the war in Israel could also impact the Federal Reserve’s next policy steps. As Marketwatch reports, Fed fund futures traders currently rate the likelihood that the Federal Reserve will not take additional action this year as higher. According to the CME FedWatch tool, the probability of a rate pause in November rose to 88.5 percent from 72.9 percent the day before, and the probability of inaction through December rose to 74 percent from 57.6 percent. That would mean the Fed’s main interest rate target would remain at a 22-year high of 5.25 percent to 5.5 percent. However, there are also reservations about these estimates. Traders, investors and even the Fed have been wrong in the past, particularly when the strength and durability of price pressures were underestimated in the run-up to the current era of inflation.

In addition, the war between Israel and Hamas over higher oil prices could lead to a resurgence in inflation. Macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace at Deutsche Bank warn of the risk of a repeat of stagflation like the 1970s – or an unwelcome mix of inflation and slower growth. “It is too early to say whether the knee-jerk reactions seen in the market on Monday will continue or accelerate. It depends on how quickly and how far this conflict spreads,” Randal explained Stephenson, head of investment banking at FE International, a mergers and acquisitions advisory firm headquartered in New York. The Fed has recently been in a phase where it probably thought it was achieving what it needed to bring inflation down and create a softer landing. But an unexpected shock like the one in the Middle East over the weekend “risks undermining central banks’ efforts to control inflation,” Stephenson said. According to the expert, if the conflict between Israel and Hamas remains contained, it would probably not have a significant impact on the country in the long term Financial markets have. However, if it spreads to other regions, it could lead to a rise in oil prices, which would be inflationary and therefore impact the Fed’s future actions.

However, it remains to be seen how the conflict in the Middle East will develop in the next few weeks and what impact it will have on the market.

Editorial team finanzen.net

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