Tensions In The Middle East Could Prevent The Fed From Lowering Interest Rates

Israeli strikes against Iran disrupt the calculations of the United States Federal Reserve (Fed). While Donald Trump increases pressure to obtain monetary easing, central bankers must now contend with a new factor of uncertainty: the geopolitical escalation that is inflaming oil prices. 

The Inflation Equation Becomes More Complex for Jerome Powell

Israeli bombings carried out on Friday against Iranian nuclear and military sites mark a major turning point in the Middle East conflict. 

This unprecedented escalation triggered an immediate surge in oil prices on international markets, reviving fears of a global inflationary push. For the U.S. Federal Reserve, this new geopolitical reality complicates an already delicate monetary equation.

Robert Sockin, senior economist at Citigroup, warns about this dynamic:

If the situation were to worsen and oil prices remained persistently high, it would only add to the challenges the Fed is already facing.

Monetary officials must now integrate this geopolitical shock into their forecasts, even as they already struggle to adapt to uncertainties linked to trade reforms driven by Donald Trump.

This surge in energy prices could quickly spread across the entire U.S. economy. Households would first feel the effects at the pump, then in their heating and electricity bills. 

On the business side, rising transportation and production costs would multiply, fueling widespread inflationary pressures. 

In such a context, a premature interest rate cut risks triggering a dangerous wage-price spiral, which the Fed is precisely trying to avoid.

The convergence of geopolitical and trade tensions places Jerome Powell in a strategic deadlock. 

On one side, Donald Trump intensifies pressure to secure monetary easing. On the other, instability in the Middle East threatens to undermine the U.S.’s disinflationary trajectory, thus weakening the normalization strategy initiated by the central bank.

A Fed Forced to Exercise Patience Despite Political Pressures

John Velis, strategist at BNY Mellon, sums up the challenge perfectly:

Monetary policy is not well adapted to deal with geopolitical shocks, but all of this means the Fed will be even more cautious. 

This caution is explained by the unpredictable nature of geopolitical conflicts and their potential impact on global supply chains.

Paradoxically, the current strength of the U.S. labor market gives the Fed some leeway. 

In May, 139,000 jobs were created, a figure above expectations, while the unemployment rate remains steady at 4.2%. This resilience offers monetary officials the chance to wait and observe the situation’s evolution before making a decision.

But this calm may be temporary. Jay Bryson, chief economist at Wells Fargo, anticipates a slowdown: “By the end of the summer, you will likely see weaker job growth“, he warns, notably pointing to massive federal employee departures. 

If the labor market were to weaken, the Fed could be forced to intervene, even in a context of high energy prices.

Financial markets have already factored in this new timeline. Futures contracts now price in a first rate cut in October, pushing back hopes for monetary easing. 

In sum, the Middle East turmoil only adds to the ambient uncertainty. Between pressures from Donald Trump, persistent trade tensions, and the oil shock, Jerome Powell faces an unprecedented puzzle. The next monetary policy meeting will be decisive: will the Fed maintain its wait-and-see approach, or will it yield to this conjunction of economic and geopolitical threats?