① Analysts stated that the U.S. military actions against Iran are unlikely to significantly push up U.S. inflation or cause substantial damage to the U.S. economy; ② Economists noted that the Federal Reserve might view the slight increase in inflation due to rising energy prices as a temporary phenomenon. However, even a minor rebound in inflation could deter the Fed from cutting interest rates in the short term.
Cailian Press reported on March 3 (edited by Bian Chun) As tensions between the U.S. and Iran continue to escalate, one of the key concerns for the market is: What impact will this conflict have on the U.S. economy and the Federal Reserve’s prospect of interest rate cuts?
Analysts said that the U.S. military actions against Iran will not significantly drive up U.S. inflation or cause major harm to the U.S. economy unless the conflict persists for several months and leads to a sharp spike in oil prices, which is considered unlikely.
Following the U.S. launch of ‘Operation Epic Fury’ against Iran, international oil prices surged significantly. The biggest fear in the market is that Iran may close the critical Strait of Hormuz—a narrow waterway along Iran’s southern coast through which one-fifth of the world’s oil and natural gas is transported via tankers.
A senior advisor to the Islamic Revolutionary Guard Corps of Iran announced late at night on March 2 local time that the Strait of Hormuz has been closed, and Iranian forces will strike all vessels attempting to pass through the strait. So far, the Islamic Revolutionary Guard Corps of Iran has not issued an official statement.
The closure of the Strait of Hormuz would undoubtedly push up international oil and gasoline prices, thereby influencing the Federal Reserve’s interest rate decisions. The specific impact would depend on the extent and duration of the strait’s closure.
Regarding the potential duration of the U.S.-Iran conflict, President Trump stated that the operation could last four to five weeks. Meanwhile, Vice President Vance recently emphasized that the attack on Iran would not escalate into a prolonged war.
Matthew Martin, Senior U.S. Economist at Oxford Economics, stated that there may be some reduction in oil supply over the next few weeks to months, which would lead to further increases in oil prices.
Economists pointed out that rising energy prices would only increase the U.S. inflation rate by a few tenths of a percentage point, provided that the price hike persists for a considerable period. They also estimated that this dispute would reduce U.S. Gross Domestic Product (GDP) by no more than a few tenths of a percentage point at most.
Tom Porcelli, Chief Economist at Wells Fargo & Co., stated, ‘Unless there is a prolonged war and significant long-term disruption to the key shipping channel of the Strait of Hormuz, the impacts on U.S. economic growth, inflation, and monetary policy will be relatively limited.’
The 12-day conflict between Iran and Israel in June 2025 serves as a recent precedent. Following Israel’s bombing of Iran’s nuclear facilities, oil prices surged above $82 per barrel but fell back below $70 within months, with little impact on the U.S. and global economies.
Jason D. Pride and Michael Reynolds, investment strategists at Glenmede, an American asset management firm, pointed out that most global conflicts have minimal long-term effects on markets and economies. In their research report to clients, they wrote, “History is replete with significant events that were perceived as near-catastrophic at the time.”
JPMorgan recently noted that the latest geopolitical shock should be viewed as an opportunity to increase equity allocations. The bank’s analysts believe that while military conflicts are difficult to predict, “given the political calendar, any escalation is unlikely to last long,” and any spike in oil prices “may eventually fade due to oversupply.”
How will this affect the outlook for Fed rate cuts?
Economists suggest that the Federal Reserve is likely to view the modest rise in inflation caused by higher energy prices as a temporary phenomenon.
However, even a slight rebound in inflation could deter the Fed from cutting rates in the short term. Prior to the outbreak of the Iran conflict, most investors expected the Fed to cut rates in July.
The CME Group’s FedWatch tool showed that on Monday, markets still leaned toward a rate cut in July, but investor doubts increased following Iran’s attack.
“The Fed will not rush to cut rates,” said George Catrambone, head of Americas Fixed Income at DWS.
Former U.S. Treasury Secretary and former Federal Reserve Chair Janet Yellen stated on Monday that the duration of the impact of the Iran conflict on oil markets would determine its effect on U.S. economic growth and inflationary pressures, complicating the Fed’s decision-making process.
Yellen, speaking at a video conference held in Long Beach, California, stated: “I believe that the recent situation in Iran has made the Federal Reserve more inclined to remain on hold, and their attitude towards interest rate cuts will be more cautious compared to before the event.”
The good news is that the U.S. economy has reached its strongest historical resilience against high oil prices. On one hand, the U.S. has regained its status as the world’s largest energy producer; significant improvements in energy efficiency have also reduced the role of oil in the economy.
Joseph Brusuelas, chief economist at RSM, said: ‘I remember as a young person in the 1970s sitting in the backseat of a car waiting in long lines to fill up with gas. One thing is for certain — we are no longer as vulnerable to sharp increases in oil and gasoline prices as we were then.’
Brusuelas maintained his forecast that the U.S. economy would experience robust growth of over 3% in the first quarter.
Analysts believe the biggest risk facing the economy could be a 10- to 20-cent increase in gasoline prices in the coming months, which would hit middle- and low-income groups in the United States.
This would add financial pressure on these households and lead to a certain degree of slowdown in consumer spending. However, current oil prices are only a few dollars higher than they were a year ago.