The Iran War has the Fed Trapped

SUMMARY

Joe Brown analyzes the impact of the ongoing conflict with Iran on U.S. bond markets, interest rates, and Federal Reserve policy. He examines how rising oil prices, employment data, and inflation metrics are shaping market expectations for rate cuts in 2026.

MAIN POINTS

• Market expectations for Federal Reserve rate cuts have diminished due to the ongoing conflict with Iran and its effects on bond yields. [0:00]
• Employment data shows rising unemployment and stalled job growth, while inflation metrics remain relatively stable. [2:00]
• Despite stable inflation and employment data suggesting potential for rate cuts, surging oil prices and inflation fears have led traders to discount the likelihood of cuts at the next Fed meeting. [4:01]
• An increase in oil prices alone cannot sustain broad inflation without corresponding money supply growth, as higher costs in one area reduce spending elsewhere. [6:00]
• Political pressure mounts for rate cuts as President Trump calls for immediate action, and the upcoming appointment of Kevin Warsh as Fed Chair is expected to bring policy changes. [9:01]
• The Federal Reserve is likely to cut rates and deregulate banks later in the year, despite current market skepticism, as economic data will support such actions. [10:00]

DETAILED ANALYSIS

The escalation of conflict involving Iran has significantly influenced U.S. financial markets, particularly by driving up yields across the Treasury curve. Despite the U.S. Treasury's record-breaking buybacks totaling $19 billion in a single week, this intervention is minimal compared to the overall size of the Treasury market, resulting in continued declines in bond prices.

Notably, the iShares 7-10 Year Treasury Bond ETF (IEF) and the TLT ETF, which tracks longer-term bonds, have experienced notable drops, signaling investor anxiety about future interest rates.

Current employment data reveals a weakening labor market, with the unemployment rate unexpectedly rising to 4.4% and payrolls falling by 92,000 in February. This stagnation in job growth is particularly significant given the Federal Reserve's dual mandate of maximum employment and stable prices, with a third, often overlooked, mandate of maintaining moderate long-term interest rates. Inflation, as measured by the Consumer Price Index (CPI), has remained largely flat for over a year, and alternative measures like Trueflation report even lower inflation rates.

Despite these indicators, the surge in oil prices—temporarily spiking to $115 per barrel before settling near $94—has heightened inflation fears, leading traders to almost entirely rule out a rate cut at the next Federal Reserve meeting. However, the analysis suggests that higher oil prices alone cannot drive sustained broad inflation without an accompanying increase in the money supply. The recent growth in the money supply, following a brief dip in 2022 and 2023, has contributed to persistent inflation, but not at levels that would preclude rate cuts if economic conditions worsen.

Political dynamics are also at play, with President Trump publicly urging the Federal Reserve to lower interest rates amid rising government debt costs and a softening labor market. The imminent transition to Kevin Warsh as Fed Chair is expected to prompt policy shifts, including potential rate cuts and deregulation to encourage bank purchases of Treasuries. While the market currently doubts significant easing this year, the combination of economic data and political pressure is likely to result in more accommodative monetary policy as the year progresses.

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