MW Iran conflict unlikely to hurt U.S. economy or boost inflation - but the Fed won't be quick to cut rates

By Jeffry Bartash

Fresh uncertainty has been spawned by fighting in the Middle East

The Strait of Hormuz is a critical chokepoint for the world's crude-oil supplies.

The U.S. attack on Iran won't boost U.S. inflation or harm the economy in a major way, analysts say, unless in the unlikely case that the conflict drags on for months and sharply raises the price of oil.

The price of oil spiked over the weekend after President Trump launched Operation Epic Fury, and U.S. stocks initially fell sharply in Monday morning trading. Yet oil prices (CL00) (BRN00) partly subsided and stocks DJIA SPX COMP mostly recovered later in the day.

The biggest worry was that Iran would close the critical Strait of Hormuz, a narrow body of water straddling the country's southern coast. One-fifth of all global oil and natural gas passes through the strait on cargo ships.

Iran threatened to use its military to close the strait and some tankers were attacked, leading shippers to suspend operations for now. The U.S. has said it's already sunk a number of Iranian ships and signaled that Iran would not be allowed to control the strait.

Still, even a partial or temporary closure could lead to higher oil and gasoline prices in the near future - with implications for the Federal Reserve.

"Though a complete closure of the Strait of Hormuz is unlikely, a partial reduction in [oil] supply is likely in store over the next couple weeks and months, which will leave these prices higher," said Matthew Martin, senior U.S. economist at Oxford Economics.

Economists say higher energy prices would only add a few tenths to the rate of U.S. inflation - and only if they persisted well beyond the immediate clash. Fertilizer prices could also go up.

Similarly, the dispute would shave no more than a few tenths off gross domestic product, the official measuring stick of the economy, they estimate.

"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," said Tom Porcelli, chief economist at Wells Fargo.

The 12-day conflict between Iran and Israel in June 2025 offers a recent example. Oil prices shot up and briefly topped $82 a barrel after Israel bombed Iranian nuclear facilities, but the cost of a barrel fell to under $70 a few months later. The U.S. and global economies barely noticed.

Investment strategists Jason D. Pride and Michael Reynolds at Glenmede point out most global conflicts have little effect on markets and the economy in the longer run.

"History is littered with numerous meaningful events that were seen as near cataclysmic at the time," they wrote in a research note to clients.

The Fed, for its part, probably would view a slight increase in inflation tied to higher energy prices as a temporary state of affairs, economists say.

Still, even a small uptick in inflation could deter the central bank from cutting interest rates anytime soon. Before the Iranian conflict, most investors expected a rate cut by July.

The odds on Monday still favored the next rate cut in July, according to the CME FedWatch tool, but investors showed more doubt after the attack on Iran.

"The Fed isn't going to be in any rush to cut rates," said George Catrambone, head of fixed income, Americas, at DWS.

The good news is that the U.S. economy is far less vulnerable than ever to higher oil prices. The U.S. has regained its place as the biggest energy producer in the world, for one thing. Huge improvements in energy efficiency have also lessened the role of oil in the economy.

"I can remember, as an adolescent in the 1970s, sitting in the back of the family car, waiting in long lines for gasoline, and can attest that we are just not as vulnerable to sharp increases in the price of oil and gasoline as we were then," said Joseph Brusuelas, chief economist of RSM.

Brusuelas said he's sticking with his forecast of robust 3%-plus U.S. economic growth in the first quarter.

The biggest danger to the economy, analysts say, could be the impact on middle- or lower-income Americans if gas prices rise 10 to 20 cents over in the next few months.

It would put more financial strain on those households and lead to some softening in consumer spending. Still, oil prices are only just a few dollars higher now than they were exactly one year ago.

Joy Wiltermuth contributed to this report.

-Jeffry Bartash

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March 02, 2026 16:40 ET (21:40 GMT)

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