The U.S. and Israeli strikes on Iran Saturday may jolt oil markets on Sunday evening. They could also dim the odds of Federal Reserve rate cuts this year.
Crude settled at $72.87 a barrel before the attacks. When trading resumes, prices are expected to rise as investors assess the risk to global supply, particularly through the Strait of Hormuz, which carries roughly one-fifth of the world’s oil and liquefied natural gas.
Oil is likely to move higher when Asian markets open, with investors likely shifting toward dollar-denominated assets in the early phase of the conflict, said Joe Brusuelas, chief economist at RSM. If crude climbs and stays elevated, gasoline prices will likely follow.
Patrick De Haan, head of petroleum analysis at GasBuddy, said the national average gasoline price, now around $3 per gallon, could rise to roughly $3.10 to $3.15 in the coming weeks if crude remains elevated. For the Fed, that increase arrives at a sensitive moment.
Inflation has run above the central bank’s 2% target for nearly five years—and tariff-related costs are beginning to work their way to the consumer, increasing prices. Services inflation has proved sticky, and markets have steadily scaled back expectations for rate cuts in 2026 as progress toward a 2% inflation rate has slowed.
Energy is excluded from the core personal consumption expenditures index, the Fed’s preferred gauge of inflation. Policymakers also often argue that monetary policy shouldn’t respond to volatile swings in oil—but that approach is easier to defend when inflation is low and expectations are stable.
Today, expectations are more fragile and gasoline prices remain one of the most visible costs for households.
After years of elevated inflation, another price hike at the pump risks reinforcing the perception that price pressures are becoming entrenched. If inflation stays around 3%, the dovish argument for easing becomes harder to make.
That could strengthen the hand of more hawkish Fed officials, who have warned against cutting rates prematurely. A majority of policymakers have already signaled that they want clearer evidence that inflation is returning to the central bank’s target rate before supporting any shift toward easier policy. A sustained rise in oil would give them additional cover to wait.
Investors have begun adjusting and have pared back expectations for rate cuts beginning in June, according to the CME FedWatch tool.
Still, there’s an argument to be made as higher oil prices tend to weigh on economic growth by squeezing household budgets and raising business costs. Energy functions like a tax, reducing discretionary spending and compressing margins. A large enough move could slow activity and cool demand-driven inflation.
Pressure on inflation, plus a potential drag on growth, complicate the Fed’s calculus. Responding too quickly to higher energy costs could cause too much tightening. Ignoring them could mean that inflation expectations drift higher.
Policymakers may not reference Iran directly in their March statement, but they may acknowledge heightened geopolitical uncertainty and risks tied to energy prices.
The situation differs from 2022, when Russia’s invasion of Ukraine triggered a historic surge in oil prices. At that time, global demand was rebounding from pandemic lows and capacity was constrained. Iran is a smaller exporter than Russia, and current global supply-demand conditions are less strained.
Still, another supply-driven price shock, layered on top of tariffs and persistent services inflation, could increase the likelihood that rates remain higher for longer.
Write to Nicole Goodkind at nicole.goodkind@barrons.com