Trump’s war is strangling the world

September 21, 2026 — 12:00pm

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When Kevin Warsh explained why the US Federal Reserve Board had lifted its policy rate for the first time in three years last week, he studiously avoided any direct references to the war in the Middle East.

Three things had changed, he said, since the Fed’s July meeting, when the Fed left the federal funds rate (the equivalent of the Reserve Bank’s cash rate) unchanged: the US economy had strengthened, inflation hadn’t slowed and the “geopolitical landscape” was one of “shocks and uncertainty”.

With the US 10-year bond yield, the world’s risk-free benchmark for assets, trading around 5 per cent, Warsh said economic strength, a surge in artificial intelligence-related expenditures and “hotspots” around the world – particularly the differences between the spot prices of energy and the “so-called crack spreads” – were driving long-term yields.

While Warsh might add growth and AI investment to the influences on US inflation, that begs the question of why other developed economies with less growth and lower AI investment – from Australia and Japan to the European Union – are also wrestling with persistently high inflation and their central banks are also raising their policy rates.

The answer lies within the Middle East. The war in the Middle East has driven up oil prices from around $US70 a barrel to over $US100 a barrel (it traded at almost $US110 a barrel on Friday) and, more particularly, has had a more dramatic impact on gasoline and diesel prices.

Why higher interest rates are the new normal

Clancy YeatesDeputy business editor

Deputy business editor

In the US, the average price of gasoline ahead of the attacks on Iran by the US and Israel in February was $US3.18 a gallon, with the average price of diesel $US3.70 a gallon. Today, the average gasoline price is $US4.47 a gallon and that of diesel $US6.50 a gallon – a........

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