Market strategist Ed Yardeni warned that the breakdown of the U.S.-Iran ceasefire risks sparking a fresh acceleration in price growth across the economy.
Yardeni cautioned that rising inflationary pressure from the conflict could compel the Federal Reserve to raise interest rates sooner than markets had previously anticipated.
The CME FedWatch tracking tool showed investors now see better than a 1-in-3 chance the Fed will raise interest rates, a significant jump from roughly 1-in-4 odds before the ceasefire collapsed.
Ongoing tensions with Iran continued to pile pressure on the Federal Reserve as policymakers weigh the economic consequences of a prolonged military standoff in the Middle East.
Higher energy prices, already pushing inflation well above the Fed’s 2% target, have become one of the central bank’s most pressing concerns heading into the second half of the year.
The Trump administration is also preparing for a new round of global tariffs, which analysts warn could add further upward pressure on import prices and complicate the Fed’s inflation-fighting task.
U.S. equities recorded a fourth consecutive weekly decline, marking the longest losing streak in a year, as investors grew increasingly uneasy about the combined threat of war and tighter monetary policy.
Bond markets also came under pressure during the same period, with the 10-year Treasury yield rising by 13.4 basis points over the course of the week.
Bank of America outlined three specific factors that could push the Fed toward a rate hike: a stable labor market, Jerome Powell remaining as Fed chair longer than expected, and a sustained oil price shock stemming from the war.
Bank of America also flagged that the risk of a hike grows meaningfully if oil prices hold above $80 per barrel for an extended stretch of time.
The convergence of geopolitical instability, tariff uncertainty, and persistent inflation has left markets in an increasingly fragile position, with investors closely watching the Fed’s next moves for any sign of policy direction.
