The attacks in the Middle East could make it harder for the Fed to cut rates.
https://x.com/netanyahu/status/1933922050319515656
Stocks tumbled on Friday after Israel launched a wave of airstrikes on Iran, pushing energy prices higher and adding to already heightened geopolitical tensions. The Dow fell 769.83 points, or 1.79%, ending the day at 42,197.79.
The S&P 500 dropped 1.13% to close at 5,976.97, while the Nasdaq lost 1.30% and settled at 19,406.83. Stocks that have led the market’s comeback from April lows dropped significantly as investors moved to shed risk.
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Conversely, oil and defense stocks saw gains; Exxon Mobil added 2%, while Lockheed Martin and Northrop Grumman each jumped more than 3%.
https://x.com/Israel/status/1934166230367178892
The market drop began Thursday evening following Israel’s defense minister, Israel Katz, declaring a special state of emergency due to the escalating conflict with Iran. Two U.S. officials confirmed that there is no U.S. involvement or assistance in this conflict. By Friday, the stock declines worsened after the Israel Defense Forces reported that Iran launched retaliatory strikes.
https://x.com/Israel/status/1934115376557658235
Iranian state television announced this as part of the sixth round of nuclear negotiations with the U.S., scheduled for this weekend. Futures for crude oil surged more than 7%, with WTI crude oil nearing $74 a barrel at one point. Gold prices also rose, driven by increased demand for safe-haven assets.
“This conflict adds challenges to the already sizable collection of worries being maintained by the markets; those aren’t going away. At the bare minimum, the spike in crude, if it persists, will have an almost immediate impact on inflation numbers,” said Mark Malek, chief investment officer of Siebert Financial. President Donald Trump, in a Friday morning post on his social media site Truth Social, urged Iran to come to the negotiating table.
Trump warned, “There has already been great death and destruction, but there is still time to end this slaughter. Iran must make a deal, before there is nothing left.” He mentioned giving Iran “perhaps, a second chance” to strike a nuclear deal.
Middle East conflict complicates Fed decisions
The escalating conflict between Israel and Iran could pose a significant challenge for the Federal Reserve as it weighs the decision to cut interest rates. Fed officials have already been cautious about cutting rates due to ongoing uncertainties surrounding President Donald Trump’s trade and immigration policies. The added instability in the Middle East now provides another layer of complexity.
Investors and analysts are concerned that a prolonged conflict could drive up oil prices, thus increasing inflation and making it more difficult for the Fed to justify a rate cut at its upcoming policy meeting next week. “If the situation were to deepen and oil prices were to stay durably higher, it would add to the challenges the Fed is already facing with potential tariffs pushing up inflation,” said Robert Sockin, senior global economist at Citigroup. “The Fed is not in a rush to cut rates because they don’t fully understand how tariffs will impact the economy.
With more risks to inflation, we’re probably looking at a potential rate cut towards the end of the year.”
Trump’s policy shifts have already introduced a significant amount of unpredictability. Fed rate-setters have indicated they prefer to see the real-world economic impacts of these policies before making further adjustments. Renewed tensions in the Middle East support this cautious approach, according to experts.
“Monetary policy is not well-suited to handle geopolitical shocks, but this situation does mean the Fed will be even more cautious,” said John Velis, Americas macro strategist at BNY Mellon. Despite these challenges, the resilience of the US labor market gives the Fed some room to maneuver. In May, employers added jobs, and the unemployment rate held steady at a low 4.2%.
First-time claims for unemployment benefits remain low, and job openings unexpectedly increased at the end of April. “If the economy starts to deteriorate, and oil prices remain high, the Fed could implement what investors call a ‘bad news’ rate cut,” said Jay Bryson, chief economist at Wells Fargo. “However, by the end of the summer, you might see weaker job growth.
With a number of federal employees potentially rolling off payrolls by November, we could even see a negative number.”
Investors are already betting on a rate cut in October, according to futures. They will get more insight into the Fed’s perspective next week when officials release a new set of projections.
