The escalating US-Israel-Iran conflict is now spilling into monetary policy expectations. Former Treasury Secretary Janet Yellen warned that the situation makes the Federal Reserve’s job significantly more complicated, especially when it comes to rate cuts.
“I think the recent Iran situation puts the Fed even more on hold, more reluctant to cut rates than they were before this happened,” Yellen said during remarks delivered via video at a conference in Long Beach, California, according to Bloomberg.
Her concern centers on oil. If the Strait of Hormuz, a critical passageway for global oil shipments, remains disrupted for more than a few days, energy prices could stay elevated or climb further. That would worsen inflation at a time when it is already running about one percentage point above the Fed’s target.
Inflation Risks Resurface
Inflation had already become a growing concern inside the Federal Reserve. Minutes from January’s Federal Open Market Committee meeting showed several policymakers were increasingly wary of persistent price pressures. Some even suggested rate hikes could return to the table if inflation failed to cool as expected.
Now, the Iran shock adds another layer of uncertainty. Higher oil prices typically feed directly into consumer costs, squeezing growth while lifting inflation, a painful combination for central bankers.
Moreover, Yellen acknowledged that no one knows how long the current tension will last. But if oil remains elevated, the Fed may be forced to stay cautious longer than markets anticipated.
Meanwhile, US equities showed mixed reactions. The SPDR S&P 500 ETF (SPY) gained roughly 0.36%, the Invesco QQQ Trust (QQQ) rose 0.4%, while the SPDR Dow Jones Industrial Average ETF (DIA) slipped about 0.34%. Retail sentiment around the S&P 500 remained broadly bullish.
Arthur Hayes FED Prediction: War = Liquidity
While Yellen sees hesitation, Arthur Hayes sees opportunity. The Maelstrom CIO argues that every major US military engagement in the Middle East ultimately leads to higher government spending and, eventually, Federal Reserve easing.
According to Hayes, history shows that conflicts like the 1990 Gulf War and the post-9/11 period pushed the Fed toward rate cuts to stabilize markets and support economic growth. He believes the same pattern could unfold again.
“The cure, as always, is cheaper and more plentiful money,” Hayes wrote.
As per him, prolonged military engagement means ballooning federal outlays. To sustain that, policymakers are likely to lower rates and expand the money supply. In that environment, Hayes expects Bitcoin and high-quality altcoins to surge.
Bitcoin is currently hovering near $66,000, well below its prior $126,000 peak. But Hayes maintains that once the Fed shifts from holding to easing, the next major crypto rally could ignite.
For now, markets remain caught between inflation fears and liquidity hopes, with the Fed standing right in the middle.
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FAQs
Rising geopolitical tension can lift oil prices and inflation, making the Fed more cautious and likely to delay interest rate cuts.
Yes. If inflation stays above target, the Fed may pause cuts or even consider rate hikes to maintain price stability.
The Fed risks facing slow growth and high inflation at once, forcing tough policy choices between supporting jobs or controlling prices.
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