Iran war forces Fed to pause rate cuts

The Iran war has upended Fed rate expectations in a single blow. US inflationThe rate at which prices rise across an economy. data released on May 13 showed core CPI accelerating faster than expected, driven by soaring gasoline and energy costs. The IEA reported that global oil inventories are falling at a record pace and will continue to decline for months as Middle East supply disruptions persist. This stagflationary shock has forced rate-cut bets to evaporate; traders now price in a higher Fed terminal rate and even odds of a rate hike rather than cuts in 2026.

The energy shock is rippling across emerging markets and commodity exporters. India's RBI Governor signaled that retail fuel prices may need to rise if oil stays elevated. India has also raised import tariffs on gold and silver to defend its currency, while the rupiah hit a record low and Turkey saw foreign-reserve outflows at their fastest monthly pace on record. European central banks, including the ECB, are signaling rate hikes may be necessary to offset stagflation risks. France's unemployment jumped above 8% for the first time in five years, and the eurozone is showing early signs of recession as energy costs bite into disposable income and corporate margins.

Equities sensitive to rates and growth have sold off in tandem with bond repricing. Tech names like Nvidia and Broadcom, which depend on multiple expansion, have faced headwinds as investors rotate to value and energy. Conversely, oil majors and energy infrastructure have rallied. Copper, which spiked above $14,000 and is approaching record highs, reflects both inflationThe rate at which prices rise across an economy. expectations and supply-chain tightness from mine disruptions. Gold has held steady despite rising rates, as the geopolitical premium offsets lower real yields.

The risk to this narrative is that energy prices could plateau or fall if the Iran crisis de-escalates or if global demand slows sharply due to recession fears. If the Fed's actual inflationThe rate at which prices rise across an economy. progress outpaces expectations or if financial conditions tighten enough to break demand, oil could tumble and bonds could rally, upending the current rate-hike regime. Skeptics also note that Trump has signaled a dovish tone on inflation, potentially limiting the Fed's willingness to hike even if the data warrants it.