Rising oil prices combined with tariff pressures are significantly narrowing the Federal Reserve's room for maneuver on monetary policy. Several economists warn that if the US takes military action against Iran, the inflation situation could worsen further, potentially eliminating any chance of a Fed rate cut this year. As US-Iran tensions escalate, WTI crude futures have risen approximately 16% year-to-date, with prices up about $10 per barrel from the start of the year. Brian Bethune, an economist at Boston College, stated in a media interview, "The case for cutting rates is evaporating before our eyes." He pointed out that rising oil prices, combined with the Trump administration's aggressive tariff policies, are creating upward pressure on inflation, making rate cut decisions increasingly complex. Traders in derivatives markets still expect the Fed to cut rates twice this year, by 25 basis points each, with the first cut in June and the second in September. However, many analysts believe evolving geopolitical risks could make this expectation difficult to fulfill. Scott Anderson, Chief US Economist at BMO Capital Markets, warned that if the conflict persists, the Fed's next move could even be a rate hike.

Inflationary pressures were already heating up before potential rate cuts. Even before the Iran situation developed, US inflation data was showing a rebound that poses a challenge for the Fed. Wholesale-level prices have been accelerating since last December and are now rising at an annual rate of 3%. Ethan Harris, former Chief Economist at Bank of America Securities, noted in a research report published on LinkedIn that rising producer prices are likely to be passed on to consumers soon. Anderson indicated that inflation appears to be heating up in the first quarter. The core Personal Consumption Expenditures (PCE) price index likely rose to a 3.1% annual rate in January, hitting its highest level in nearly two years—and this data precedes any potential US military action against Iran. The Fed's inflation target is 2%. He estimates that every $10 increase in oil prices will raise consumer price inflation by 0.2 to 0.4 percentage points over the next year. Given the approximate $10 per barrel increase year-to-date, the impact is significant. "Just the increased risk of conflict with Iran is already impacting energy markets and prices, exacerbating US inflation pressures, and creating significant obstacles for the Fed to cut rates further," Anderson said.

Economists note that the peculiarity of this round of inflationary pressure is that both tariffs and rising oil prices are supply-side shocks, which directly increase production input costs. The Fed's interest rate tools primarily affect the demand side by stimulating or restraining business and consumer spending to regulate the economy; their effectiveness in cooling supply-side shocks is extremely limited. Brian Bethune stated bluntly, "In this situation, the Fed simply cannot cut rates." He said the core issue is the Fed's difficulty in applying the brakes to inflation. Anderson further cautioned that if the conflict evolves into a prolonged standoff, the possibility of the Fed's next move being a rate hike instead of a cut cannot be ruled out.

Several geopolitical and macroeconomic analysts believe the probability of US military action against Iran is increasing, which would be a key variable affecting oil price trends. Suzanne Maloney, Director of the Foreign Policy Program at the Brookings Institution, pointed out that since January, the US has been increasing its military presence in the Middle East in a "slow, incremental manner." Christopher Granville, Managing Director of Macro Forecasting Advisory at TS Lombard, said the likelihood of US military action against Iran "seems to be above 50%." Granville believes that even if military confrontation occurs, the likelihood of the global economy falling into a full-blown oil crisis and stagflation shock remains limited, but a scenario similar to the "oil price surge" after the Russia-Ukraine war broke out in early 2022 cannot be ruled out—at that time, oil prices briefly exceeded $100 per barrel and remained elevated for about six months. That shock was sufficient to push US inflation significantly higher, with the core PCE price index reaching a 5.6% annual rate in September 2022, its highest level in nearly 40 years. Currently, most bank analysts still predict the average oil price for 2026 will remain in the low range around $60 per barrel, but they also acknowledge the difficulty in predicting the direction of the Middle East situation.

Iran's potential impact on oil prices depends not only on US military action itself but also on Iran's likely countermeasures. Karen Young, Senior Research Scholar at Columbia University's Center on Global Energy Policy, pointed out that the extent of any oil price spike hinges on whether Iran, in response to US actions, would strike oil production facilities in neighboring countries. Additionally, Iran has the capability to disrupt shipping through the Strait of Hormuz. The Strait of Hormuz is a vital shipping channel connecting the Persian Gulf, the Gulf of Oman, and the Arabian Sea, through which a significant portion of global oil is transported. Vali Nasr, Professor at Johns Hopkins University's School of Advanced International Studies, believes Iran is likely to choose to strike its neighbors. Speaking at a discussion event hosted by the Chicago Council on Global Affairs this week, he stated that the Iranian government's assessment is that if Trump believes war has no cost, "he will continue to do this," giving Tehran a motive to respond forcefully. HSBC also projected in its latest research report that even a brief Iranian blockade of the Strait of Hormuz would quickly push Brent crude prices above $80 (currently $73).