Geopolitical risks and the oil shock from the Iran war were cited as the two biggest concerns facing the US financial system, according to a new Federal Reserve report.
The US central bank's semi-annual financial stability report underscored the degree of uncertainty the conflict in the Middle East is having on the broader financial system, with survey participants listing the geopolitics and the oil crisis as their top fears.
Three fourths of survey respondents cited geopolitical risks as a top near-term concern, with risks posed by artificial intelligence, private credit and persistent inflation also rising.
Oil prices have risen more than 40 per cent since the US and Israel launched co-ordinated strikes against Iran on February 28. Tehran retaliated by effectively shutting down the Strait of Hormuz, a key chokepoint through which a fifth of the world's global oil consumption passes. Around 20 million barrels per day, along with more than a third of the world's fertiliser and almost a quarter of the total petrochemicals, passes through the strait.
Key energy sites across the Middle East have also been damaged by Iranian strikes including Qatar's Ras Laffan complex and the UAE's Jebel Ali Port.
“Respondents widely noted the Iran conflict’s potential to cause prolonged supply disruptions in energy markets as well as the possibility of a prolonged period of higher inflation,” the report said.
US Secretary of State Marco Rubio earlier on Friday said Washington was waiting for Iran's response to a proposal to end the war. Meanwhile, Iran threatened to retaliate with “decisive force” after the US military attacked two Iran-flagged tankers that were bound for Iranian ports.
The US central bank has adopted a wait-and-see posture as it evaluates the economic impact from the war. The Fed and its counterparts in the UK and EU held interest rates steady earlier this month, citing uncertainty over the conflict and its duration.
Fed officials anticipate the war will lead to an inflationary bump, although warned a prolonged conflict will have a greater impact on both price stability and economic growth.
New projections released by the International Monetary Fund also warned the war will lead to high inflation and low growth in its best-case scenario, while not ruling out a global downturn.
The Fed report said “several” respondents noted that persistent inflation from the energy shock could force central banks to raise interest rates even if growth weakened, which would amplify other vulnerabilities.
It also showed the conflict's reach extends beyond the economy, with supply-chain shortages and concerns over AI-related valuations could trigger a potential correction in risk assets.
