Wall Street Hot Topic: How Will the U.S.-Iran Conflict Affect the U.S. Economy and the Federal Reserve's Rate Cut Outlook?

As the US-Iran conflict continues to escalate, one of the market’s main concerns is: how will this war impact the US economy and the Federal Reserve’s outlook on interest rate cuts?

Analysts say that US military actions against Iran are unlikely to significantly raise US inflation or cause major damage to the US economy unless the conflict lasts for months and leads to a sharp surge in oil prices, which is considered unlikely.

After the US launched the “Epic Firestorm” operation against Iran, international oil prices surged. The market’s biggest worry is that Iran might close the crucial Strait of Hormuz—a narrow waterway off Iran’s southern coast through which one-fifth of the world’s oil and natural gas are transported by ships.

An advisor to the Iranian Islamic Revolutionary Guard Corps stated late on March 2 local time that the Strait of Hormuz has been closed, and Iran will target all ships attempting to pass through it. The IRGC has not yet issued an official statement.

The closure of the Strait of Hormuz would undoubtedly push up international oil and gasoline prices, which could influence the Federal Reserve’s interest rate decisions, depending on the extent and duration of the closure.

Regarding the potential duration of the US-Iran conflict, President Trump said the operation could last four to five weeks. Vice President Pence recently insisted that attacking Iran would not escalate into a long-term war.

Matthew Martin, a senior US economist at Oxford Economics, said that in the coming weeks or months, oil supplies might decrease to some extent, leading to further increases in oil prices.

Economists say that rising energy prices would only increase US inflation by a few tenths of a percentage point, provided that the price increase lasts for a considerable period. They also estimate that this dispute would at most reduce US GDP by a few tenths of a percentage point.

Tom Porcelli, chief US economist at Wells Fargo, stated, “Unless a long-term war breaks out and the Strait of Hormuz—a key shipping route—suffers a major, prolonged disruption, the impact on US economic growth, inflation, and monetary policy will be limited.”

A recent precedent is the 12-day conflict between Iran and Israel in June 2025. After Israel bombed Iran’s nuclear facilities, oil prices briefly surged above $82 per barrel, but a few months later, they fell back below $70, with little impact on the US and global economies.

Jason D. Pride and Michael Reynolds, investment strategists at Glenmede, noted that in the long run, most global conflicts have minimal impact on markets and economies. In their research report to clients, they wrote, “History is filled with many events once considered nearly catastrophic.”

JPMorgan recently pointed out that the latest geopolitical shocks should be seen as opportunities to increase stock allocations. The bank’s analysts believe that although military conflicts are unpredictable, “considering the political schedule, escalation is unlikely to last too long,” and any surge in oil prices “may ultimately subside due to oversupply.”

How does this affect the Federal Reserve’s interest rate outlook?

Economists say that the Fed may view the slight rise in inflation caused by higher energy prices as temporary.

However, even a small increase in inflation could cause the Fed to hold off on rate cuts in the short term. Before the Iran conflict erupted, most investors expected the Fed to cut rates in July.

The CME FedWatch Tool shows that the market still leans toward a rate cut in July, but concerns have increased after the Iran attack.

“The Fed won’t rush to cut rates,” said George Catrambone, head of fixed income at DWS Americas.

Former US Treasury Secretary and former Fed Chair Janet Yellen said Monday that how long the Iran conflict impacts the oil market will determine how much it affects US economic growth and inflation, making Fed decisions more complicated.

Yellen stated during a video conference in Long Beach, California, “I think the recent Iran situation makes the Fed more inclined to hold steady. Compared to before the event, they will be more cautious about rate cuts.”

The good news is that the US economy’s resilience to high oil prices has reached its strongest level in history. On one hand, the US has become the world’s largest energy producer again; on the other hand, significant improvements in energy efficiency have reduced the role of oil in the economy.

Joseph Brusuelas, chief economist at RSM, said, “I remember when I was young in the 1970s, sitting in the back of a car waiting in long lines to fill up. Clearly, we are no longer as vulnerable to sharp rises in oil and gasoline prices as we were then.”

Brusuelas maintains his forecast that the US economy will grow by over 3% in the first quarter.

Analysts believe the biggest risk to the economy could be that a $0.10 to $0.20 increase in gasoline prices over the next few months would hit middle- and low-income households hard.

This would increase financial pressure on these families and lead to some slowdown in consumer spending. However, current oil prices are only a few dollars higher than a year ago.