The attacks in the Middle East could make it harder for the Fed to cut rates.
Federal Reserve Chair Jerome Powell recently spoke at a conference where the potential impacts of President Donald Trump’s policy changes on the economy were discussed. Analysts noted that Fed officials were cautious about cutting rates due to the unpredictability of the administration’s sweeping policy changes.
Now, heightened tensions in the Middle East are adding complexity to the Fed’s decision-making process. Last Friday, Israel launched strikes on Iran’s nuclear and military sites, intensifying concerns about a prolonged conflict.
@POTUS's exuberance over Iranian losses was short-lived.
Iran’s response-exercising less restraint this time—showed the ability of our military to inflict heavy damage, in spite of assistance to Israeli aggressors by US & cohorts.
Netanyahu is inaugurating the real "forever wars"— Javad Zarif (@JZarif) June 14, 2025
These developments have investors and analysts worried that increased oil prices and global inflation could follow, putting additional pressure on the U.S. economy.
Robert Sockin, senior global economist at Citigroup, said, “If this situation were to deepen further and oil prices were to stay durably higher, it would just add to the challenges that the Fed is already facing with the potential for tariffs to push up inflation.”
Iran is the world’s most dangerous terror regime.
We’ve seen what they’re capable of – and we will not stand by.
We will not let them acquire the world’s most dangerous weapon.
Israel does what must be done. pic.twitter.com/PplZwpvda8
— Israel ישראל (@Israel) June 15, 2025
Fed officials have maintained that they are not in a rush to cut rates, emphasizing the need to observe the longer-term impacts of ongoing trade tensions and tariffs on the economy.
Iran made its intentions clear; we had no choice but to act.
As Iran moves toward nuclear weapons and targeting innocent civilians, the IDF is taking action to protect Israel and to stop a threat the world can’t afford to ignore.
Via @IDF pic.twitter.com/62jivby96U
— Israel ישראל (@Israel) June 15, 2025
Middle East tensions add complexity
The renewed conflict in the Middle East underscores this caution.
John Velis, Americas macro strategist at BNY Mellon, stated, “Monetary policy is not well-suited to deal with geopolitical shocks, but all this does mean that the Fed will be even more cautious.”
One key reason the Fed can afford to wait before considering rate cuts is the resilience of the U.S. labor market. In May, the unemployment rate held steady at a low 4.2%, with employers adding jobs, according to the Labor Department. Additionally, first-time claims for unemployment benefits remain relatively low, and job openings surged at the end of April.
Gallery: Prime Minister Benjamin Netanyahu, directing the preemptive strike against Iran.
Photos: Avi Ohayon, GPO pic.twitter.com/5vxIhKwvr2
— Prime Minister of Israel (@IsraeliPM) June 14, 2025
However, if the economy shows signs of significant deterioration, the Fed might resort to what investors term a “bad news” rate cut, even amidst high oil prices. Jay Bryson, chief economist at Wells Fargo, said, “We’ll see how long oil prices remain elevated, which could lead to inflation at the headline level if the conflict widens across the Middle East.” He added that by the end of the summer, weaker job growth and the effects of federal employee buyouts could potentially lead to a negative employment growth number by November. Investors are currently betting on a rate cut in October, and the Fed’s forthcoming projections, set for release next week, will be closely scrutinized for insight into their thinking.
As geopolitical developments unfold, the Federal Reserve continues to navigate a complex landscape, balancing the impacts of international conflicts and domestic economic policies.
