Long-term interest rates, such as those for mortgages and government debt, are higher than they were just a few months ago, before the war. Treasury bond rates had started to fall when the U.S. Supreme Court struck down the Trump administration’s “Liberation Day” tariffs in February. A week later, the United States and Israel attacked Iran, setting into motion a cascade of economic effects that reversed the decline in interest rates and then sent them back up.
New analysis from the Center for American Progress estimates the billions in increased costs that Americans are paying for borrowing due to the Iran war’s effect on interest rates. Compared to what interest rates would have been without the war, rates are at least 0.5 percentage points higher. There is a lot of uncertainty about the future direction of interest rates. This calculation, for example, ignores the fact that the Federal Reserve likely would have cut rates absent the war and is now considering raising rates, but it also ignores that interest rates could come down with less inflationary pressure. That 0.5 percentage point increase for the rest of 2026 on top of higher interest rates since the start of the war could translate into $4.6 billion in additional interest payments for households on new mortgages and other forms of consumer credit, such as car loans and credit cards, in 2026. Nonfinancial businesses—including corporations and small businesses—could face at least $12.7 billion in additional interest costs. And the federal government could pay at least $30.8 billion more in interest payments on new national debt in 2026.
The war’s inflationary pressures have pushed up interest rates
Since the start of President Donald Trump’s second term, his administration has created inflationary pressures with tariffs, deportations, cuts to clean energy, and now the Iran war. Long-term interest rates that matter for people, businesses, and the government are staying higher for longer, even as the Federal Reserve has cut its short-term federal funds rate. The gap between the short-term federal funds rate, which the Federal Reserve controls, and the 10-year Treasury bond rate stood at 0.85 percentage points on average in May. This was an increase in this gap from a negative difference of 0.28 percentage points in November 2024, when markets expected inflation to decline. It was also up from 0.3 percentage points when Trump took office in January 2025—largely because his policies were seen as inflationary. The Iran war has made a bad situation worse.
The Iran war has given long-term interest rates their latest boost. The attacks on oil infrastructure in the Persian Gulf region and the closing of the Strait of Hormuz have created upward pressures on prices. (see Table 1) As of June 22, the higher gas and diesel prices since the war began have cost Americans about $468.68 per household, according to the Climate Solutions Lab at Brown University. In a separate analysis, Moody’s Analytics estimated that across higher prices and increased military spending, the war has so far cost $750 per household. Bureau of Labor Statistics data for May 2026 show that inflation went up again to 4.2 percent over the past 12 months. Prices for gasoline, for example, jumped by 7.0 percent in May alone. Fuel oil also increased by a substantial 3.8 percent just in May. In addition, airline prices went up by 2.7 percent in May alone, even though the data are seasonally adjusted. That is, airline prices increased a lot more than would have been expected at the start of the summer.
Inflation will likely stay high throughout 2026, even as the Strait of Hormuz opens again. The war has destroyed critical infrastructure for oil and natural gas. It takes time for oil and gas to reach refineries and other production facilities. The interim agreement with Iran only sets a clock of 60 days for negotiations to reach a final deal. It remains highly uncertain whether the ceasefire persists and leads to a final agreement. Shipping companies are worried that their ships will again get stuck in the Persian Gulf. And, even if they enter the Persian Gulf, they will only be able to move slowly due to the suspected minefields that they have to navigate. The longer the Strait of Hormuz stays effectively closed, the longer inflationary pressures will persist and interest rates stay high.
The continuation of the conflict also means that interest rates will remain high. First, the Federal Reserve already held off on reducing interest rates during its April and June meetings. The expectation for 2026 was at least two rate cuts, for a total of about 0.70 percentage points. Instead, the Federal Reserve has held off on cutting interest rates this year. In fact, the Fed has signaled that it will not cut interest rates any time soon, and some decision-makers at the Federal Reserve’s Board of Governors—the people who decide on its key interest rate, the federal funds rate—have voiced support for raising interest rates. Members of the Federal Reserve again expected a 0.25 percentage point increase later this year at their June 16–17 Fed meeting. Second, banks and other lenders want to be compensated for that higher inflation if they lend money for long periods of time. Federal Reserve researchers regularly measure the expected inflation that is captured in 10-year Treasury bond rates. Their estimates show the market for Treasury has priced in 0.1 percentage point higher inflation for the next decade since the start of the war.
If the Trump administration had not started its war in Iran, long-term interest rates on mortgages, corporate bonds, and government borrowing would now likely be at 0.5 percentage points lower—that is, the difference between the average 10-year Treasury bond rate in May 2026 and on February 27, 2026. (see Appendix) With inflationary pressures high, it is likely that the rate will stay high for some time. In the absence of the war and its inflationary pressures, the Fed would likely have cut rates, and rates today would be even lower than they were at the end of February.
Higher interest rates translate into billions of dollars of extra costs for Americans
The approximately 0.5 percentage point increase in long-term interest rates over the three months since the war began translates into billions of dollars of extra costs for American households, businesses, and governments. Consider two scenarios: one in which borrowers face additional interest payments stemming from the increase in long-term rates due to the war (scenario 1); and another which considers those higher rates, foregone Federal Reserve rate cuts, and the opportunity cost of a narrower gap between long-term and short-term interest rates (scenario 2).
For example, households took out an additional $435 billion (in inflation-adjusted terms) in new mortgages in 2025. That sum includes both home mortgages and commercial mortgages taken out as household debt by small business owners who own real estate. Households also borrowed more money for car loans and on credit cards, among others. On average, consumers borrowed an additional $697 billion in new loans in all forms of credit in 2025. Households will face higher interest rates on adjustable-rate loans such as adjustable-rate mortgages and credit card debt. Under reasonable assumptions (detailed in the Appendix), households will need to finance $2.3 trillion of their existing debt at the end of 2025 throughout 2026.
Assuming households will borrow the same amount of new debt, refinance the same shares as in past years, and the higher interest rate applies across all forms of credit in 2026—under the more conservative first scenario—a 0.5 percentage point increase in interest rates means $4.6 billion in additional interest rate payments in 2026 alone for households. Under the second scenario, the additional costs would be $7.4 billion from March through December 2026. These higher costs add to the affordability crisis.
Higher interest rates will slow business investment and lead companies to pursue riskier investments. Business investments now will need to generate higher rates of return, driving businesses to either pursue riskier ventures or stop investing if they cannot cover those higher costs. Nonfinancial corporations borrowed an additional $579 billion (in inflation-adjusted dollars) in private markets and from banks in 2025, a lot of it in risky so-called private credit—money from unregulated and nontransparent lenders. They will also likely have to refinance $3.5 trillion in existing debt at the end of 2025 throughout 2026. (see Appendix) Furthermore, nonfinancial noncorporate businesses—typically small businesses such as construction contractors—borrowed $252 billion at that time. Those businesses also have expiring debt that they need to refinance, about $4.0 trillion at the end of 2025. (see Appendix) If businesses borrow the same amount of new debt in 2026 as they did in 2025—and if they refinance that debt throughout 2026—they would have to pay an extra $12.7 billion in 2026 due to the Iran war under the first scenario. The costs would be $20.6 billion under the second scenario, which accounts for the assumption that the Fed forgoes interest rate cuts.
Finally, the Congressional Budget Office (CBO) projects that the federal government will need to borrow $1.85 trillion in 2026, much of which goes to financing the Big Beautiful Bill’s tax cuts for the richest Americans. The federal government also needs to refinance some share of its existing debt in 2026, facing higher interest rates when it does. The CBO provides a calculator for this purpose. The additional costs to the federal government from the higher interest rates as detailed in the Appendix will be $30.8 billion under the more conservative first scenario. The amount would go up to at least $52.5 billion under the second scenario.
The Trump administration’s war is making life less affordable for people, increasing struggles for businesses seeking to invest, and driving up the debt burden of the federal government.
Methodological appendix
This column calculates the additional interest costs for households, businesses, and the federal government for 2026 in two different scenarios. Scenario 1 uses just the increase in long-term interest rates. It assumes that absent the Iran war, interest rates would have stayed at the level of February 27, 2026. Scenario 2 assumes that the Federal Reserve would have cut interest rates and that the gap between long-term and short-term interest rates would have shrunk without the war.
The calculations for the more conservative scenario 1 proceed as follows. The change in interest rates is the difference in the 10-year Treasury bond rate since February 27, 2026, when it stood at 3.97 percent. Relative to the February 27 baseline, the interest rate was on average 0.28 percentage points higher in March, 0.35 percentage points higher in April, and 0.51 percentage points higher in May. The analysis assumes that the difference in interest rates for the rest of 2026 remains at 0.51 percentage points compared to the nonwar counterfactual from June through December 2026. Given the uncertainty surrounding interest rates for the rest of the year, it is safest to assume no additional changes. On the one hand, interest rates could slowly abate because of moderating inflation, but, on the other hand, members of the Federal Reserve have indicated that the Fed could raise interest rates amid persistent inflation.
Scenario 2 used the same interest rate differences as a starting point. It then added 0.05 percentage points in March and an additional 0.1 percentage points from April through December 2026 to reflect the likely narrowing in the gap between short-term and long-term interest rates that would have occurred absent the Iran war. It also reflects the decline in inflation expectations from the end of January to the end of February; the calculations assume that this decline in inflation expectations would have continued for two more months. Scenario 2 also added 0.25 percentage points from May through December to capture a Federal Reserve interest rate cut that did not happen because of the war and another 0.25 percentage points from October through December for a second cut that was assumed not to happen because of the war. Altogether, the resulting interest rate differences between the war and nonwar scenarios thus range from 0.33 percentage points (0.28 + 0.05) in March to 1.11 percentage points (0.51 + 0.1 + 0.25 +0.25) in December. The additional 0.25 percentage points in May (and then again in October) reflect assumed interest rate cuts by the Federal Reserve in a nonwar scenario.
Across both scenarios 1 and 2, the additional interest rate payments for households are the new debt each month times the corresponding higher interest rate for each post-war month in the rest of 2026. That is, the calculations apply the additional interest rates cumulatively through December 2026 to each month’s new debt.
Households, businesses, and the government need to finance any new borrowing and they need to pay higher interest on existing loans that have adjustable rates or need to be refinanced in 2026. The author assumed that the total amounts of new household and business debt will be the same in 2026 as they were in 2025. The calculations used data from the Federal Reserve’s Release Z.1 from March 16, 2026, and deflated the seasonally adjusted flows of new debt by the Personal Consumption Expenditures (PCE) deflator from the Bureau of Economic Analysis, with the PCE series re-indexed to the fourth quarter of 2025 so that all data are expressed in December 2025 dollars.
Real new household loans (Table F.101: FA154123005.Q) equaled $697 billion in 2025. The author’s calculations assumed that households borrow an additional $58 billion each month, which is just one-twelfth of $697 billion, in 2026. Nonfinancial corporate businesses took out an additional real $579 billion in loans (Table F.103: FA104123005.Q) and debt securities (Table F.103: FA104122005.Q) and nonfinancial noncorporate businesses borrowed another $252 billion in 2025 in loans (Table F.104: FA114123005.Q). Assuming the same level of borrowing, corporations and noncorporate businesses would borrow an additional $69 billion each month in 2026.
The author also assumed that the higher interest rates applied to the share of debt that rolls over each year. For instance, the analysis assumes that 5 percent of all existing mortgages at the end of 2025 will see higher interest rates in 2026. This is in line with the share of adjustable-rate mortgages out of all mortgages. The author also assumed that 25 percent of all other (nonmortgage) consumer debt such as credit cards and car loans at the end of 2025 will see higher interest rates in 2026. This is approximately the share of credit card debt out of all other consumer credit, which made up a little over one-fourth of all consumer debt at the end of 2025 and in early 2026. In total, $2.3 trillion in household debt (equal to 5 percent of $14.4 trillion in mortgages and 25 percent of $6.3 trillion in other consumer debt) will see interest rate increases in 2026. Mortgages are the sum of residential and commercial mortgages (Table L.101: FL153165105 and FL163165505) taken out by households. Again, households finance one-twelfth of that adjustable-rate debt.
The author also assumed that about half of the outstanding corporate and noncorporate business loans at the end of 2025 will roll over and see higher interest rates in 2026. This implies an average maturity of two years for all commercial and industrial loans (Table L.103: FL104123005 and Table L.104: FL114123005). This assumed maturity is above its historic levels. Furthermore, the average maturity of corporate bonds in 2026 was somewhat above 10 years. The calculations then assume that corporate businesses need to finance 9 percent of their outstanding debt securities (Table L.103: FL104122005) in 2026. Under these assumptions, nonfinancial businesses needed to refinance $7.5 trillion in existing debt at the end of 2025 throughout 2026. The author assumed that one-twelfth of all new loans that businesses financed—covering new borrowing and refinanced existing debt—occurred stepwise in each month in 2026.
Finally, the Congressional Budget Office projected in February 2026 that the federal government would need to borrow an additional $1.85 trillion in 2026. The federal government also needs to refinance a portion of its existing debt each year. The CBO provides a calculator for the effect of higher interest rates on the federal deficit. The calculator allows for interest rate changes up to 1 percentage point. Since the second scenario assumes slightly larger interest rate increases than that for the last three months of the year, the estimated additional costs to the government represent a small understatement of the likely costs. Given that the federal government already has a deficit, an increase in the deficit from higher interest rates almost entirely reflects higher interest payments. The calculator calculates the effect of higher interest rates, as detailed above, over the course of the entire year 2026. The calculations attribute one-twelfth of the effect of a month’s higher interest rate to that month.