Israeli attacks on Iran alter the calculations of the U.S. Federal Reserve (Fed). While Donald Trump intensifies pressure for monetary relief, central bankers must now deal with a new factor of uncertainty: the geopolitical escalation that ignites oil prices.
The Israeli bombings carried out on Friday against Iranian nuclear and military sites mark an important turning point in the conflict in the Middle East.
This unprecedented escalation caused an immediate spike in oil prices in international markets, reigniting fears of an inflationary surge on a global scale. For the U.S. Federal Reserve, this new geopolitical reality further complicates an already delicate monetary equation.
Robert Sockin, senior economist at Citigroup, warns about this dynamic:
"If the situation worsened and oil prices remained high for a long time, it would only exacerbate the challenges the Fed is already facing."
Monetary authorities must now include this geopolitical shock in their forecasts, while they are already struggling to adapt to the uncertainties related to the trade reforms driven by Donald Trump.
This rise in energy prices could quickly spread throughout the U.S. economy. Households would first feel its effects at the gas pump, then in their heating and electricity bills.
On the corporate side, increases in transportation and production costs would multiply, fueling widespread inflationary pressures.
In such a context, a premature reduction in interest rates could trigger a dangerous price-wage spiral that the Fed is precisely seeking to avoid.
The convergence of geopolitical and trade tensions puts Jerome Powell in a strategic dead end.
On one hand, Donald Trump is intensifying pressure for monetary relief. On the other, instability in the Middle East threatens to compromise the disinflationary trajectory of the United States, thus weakening the normalization strategy undertaken by the central bank.
John Velis, strategist at BNY Mellon, perfectly summarizes the challenge:
"Monetary policy is not well-suited to address geopolitical shocks, but all this means that the Fed will be even more cautious."
Follow me for more analysis and news, hit 👍 and share, that would help me a lot to keep growing.
