Oil prices jumped and global stocks stumbled immediately following U.S. and Israeli strikes on Iran and Tehran’s retaliation, but economists say the war will likely not have much impact on the Federal Reserve’s upcoming interest rate decision.
For now, the war that killed Iran’s supreme leader, Ayatollah Ali Khamenei, and led to disrupted traffic through the Strait of Hormuz is expected to mean higher gas prices for American consumers and potential increased volatility in financial markets.
Although analysts are watching for signs that high energy costs could mean heightened inflation, Wells Fargo Chief Economist Tom Porcelli said the war presents a supply-driven oil price shock, exactly the kind of spike Federal Reserve officials aim to “look through” when setting interest rates.
“…Absent a prolonged war and major long-term disruptions to key shipping routes in the Strait of Hormuz, the impact on U.S. economic growth, inflation and monetary policy should remain modest,” Porcelli said in a March 2 special commentary, adding the situation is fluid. “Of course, the opposite also could be true.”
What US consumers can expect
U.S. consumers may have been hoping for potentially cheaper gas given recent activity in Venezuela, but are now drawing the natural conclusion that prices could go up, according to Shikha Jain, a partner and head of consumer, North America at Simon-Kucher, a commercial strategy consulting firm.
Jain said it may be too early to know, but she doesn’t think there will be panic-buying of gas or grocery store items due to the war.
“You might start to see people try to fill up their gas as much as possible in their car, but what more can you do other than that?” Jain said. “It’s not like you’re going to … suddenly keep tanks at home or barrels of gas at home.”
Time will tell if gas stations see lines like they did during the COVID-19 pandemic, she said. But the difference then was that people were getting ready for a lockdown with a lot of unknowns, she added.
President Donald Trump has said he expects the campaign could last four to five weeks, but that the U.S. military has the “capability to go far longer than that.”
Wayne Winegarden, a senior fellow in economics at the Pacific Research Institute, said the timeline matters significantly. If the war is short, and new Iranian leadership are able to make a deal with the United States and Israel, Winegarden said American consumers may see higher prices at the gas pump for a few weeks.
If the war drags on or escalates, he said, American consumers may see skyrocketing energy costs that could push the U.S. economy toward stagflation.
“That’s what’s so scary,” Winegarden said. “Both are possible.”
What does war with iran mean for the federal reserve?
The Federal Open Market Committee’s next meeting is scheduled for March 17 through March 18, giving officials a few weeks to judge whether the Iran war in fact represents a passing oil shock, or a new factor that will contribute to persistent inflation.
An internal Fed paper, published last year as part of the central bank’s Finance and Economics Discussion Series, found Russia’s invasion of Ukraine, which disrupted oil markets, alongside the COVID-19 pandemic, were major drivers of the United States’ inflation surge in 2020 through 2023.
So far, Porcelli said the Iran war is unlikely to have a major impact on the Fed’s upcoming interest rate decision.
“A jump in oil prices would generate higher headline inflation, but this would be driven by a supply shock rather than overly hot aggregate demand,” Porcelli said in the note. “Accordingly, tighter monetary policy would do little to mitigate the hotter inflation and instead would further compound the hit to economic growth.”
Porcelli added, however, Fed officials will likely be sensitive to any deviations in inflation expectations as the war continues. “But again, any unanchoring here would stem from prolonged war and persistently higher energy prices,” he said.
For now, Fed officials are likely to take a wait-and-see approach, depending on data, according to Oxford Economics’ Chief Global Economist Ryan Sweet and Director of Global Macro Research Ben May.
Winegarden told USA TODAY the war reinforces the expectation the Fed will hold rates steady “because of all the uncertainty.” As of March 2, forecasters predict the FOMC will hold its benchmark interest rate steady at a range of 3.5% to 3.75% at its next meeting.
How does war with iran affect supply chains?
Markets closely watched the war unfold over the weekend as Iran supplies about 4% of the world’s crude oil and controls the Strait of Hormuz.
Oil supply disruptions can drive prices up, though several geopolitical shocks have historically led to short-lived spikes and limited market impact, according to Angelo Kourkafas, a senior global strategist of investment strategy at Edward Jones.
“Oil prices tend to rise ahead of these events. Markets may have already priced in much of the risk, and prices could fade from here,” Kourkafas said in a note to USA TODAY, adding the global oil market is in oversupply. “Structural shifts, like the U.S. becoming a net petroleum exporter and lower energy intensity in the economy, also provide resilience.”
Jain said higher gas prices could raise the costs of materials – costs businesses would need to shoulder and could potentially pass on to consumers.
Gas prices are probably top of mind right now for consumers, Jain said, “but as this escalates, we might see some different patterns.”
Air cargo networks are also experiencing constraints, with FedEx suspending flights to and from Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and United Arab Emirates over safety concerns.
Those planes, along with trains, cars, and manufacturing equipment, all rely on oil and gas to run.
“Anything that moves from point A to point B to get to the end of the supply chain is impacted by this,” Amanda Oren, vice president of industry strategy for grocery at RELEX, said.
This article originally appeared on USA TODAY: What war with Iran means for prices, interest rates, supply chains
Reporting by Rachel Barber and Betty Lin-Fisher, USA TODAY / USA TODAY
USA TODAY Network via Reuters Connect
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