Trump's Iran strikes may have given the Fed another reason to keep rates high

• Trump wants lower rates, but he may have just given the Fed a new reason to sit tight.
• America's strikes on Iran sent oil prices higher, a development that could worsen inflation.
• Trump has often criticized the Fed and Jerome Powell for being too late to adjust policy.

President Donald Trump's decision to strike Iran's nuclear sites could end up creating a new reason for the Federal Reserve to hold off a while longer before lowering interest rates.

That's because a sustained surge in oil prices stemming from US involvement in the Israel-Iran conflict could complicate the outlook for inflation.

The Fed has held rates steady all year, to the dismay of the president, who has demand that borrowing costs come down. Trump threatened to fire Fed Chair Jerome Powell earlier this year before backing down as markets balked at the idea. Others in the administration have also piled on, blaming the central bank for things like the housing supply crunch.

Powell, for his part, insists that the central bank is taking a cautious but appropriate approach while officials wait to see how tariffs and other policies impact inflation.

Now, oil could be yet another wrinkle in the Fed's forecast.

Brent crude, the international benchmark, was about $76 a barrel on Monday after the US targeted three of Iran's nuclear facilities. The international oil benchmark is up 14% from its price on June 12, and around 26% higher since its most recent low in May.

West Texas Intermediate crude traded as high as $74 a barrel, up 9% since June 12 and up 30% from the low last month.

Prior to the Israel-Iran escalation, oil prices had been trending lower for most of 2025, contributing to much of the decrease in inflation.

Energy was the only category in the consumer price index that saw an unadjusted decrease in the last 12 months leading up to May, according to the Bureau of Labor Statistics. Energy commodity prices were down 11.6% that month compared to last year, and gasoline prices were down 12%.

Observers on Wall Street are eyeing the risks to inflation from the conflict.

"The eruption of fresh hostilities in the Middle East adds to the case for a drift higher in the term premium over this decade," economists at TS Lombard wrote in a note last week, though the firm said that the shock to oil prices likely wouldn't be enough to meaningfully sway inflation in major economies.

"The worry comes from the number of different negative supply shocks potentially hitting the US economy at the same time," the firm added, pointing to price increases stemming from Trump's tariffs and the potential inflationary impact of migrant deportations.

Torsten Sløk, the chief economist at Apollo Global Management, saw similar pressures contributing to stagflation, a scenario where the economy slows while inflation remains stubbornly high.

"In short, higher oil prices exacerbate the ongoing stagflation shock stemming from tariffs and immigration restrictions," Sløk wrote in a June note to clients.

JPMorgan analysts said in a note on Monday that oil prices could potentially rise as high as $130 a barrel if conflict between Israel and Iran disrupts production in the Persian Gulf. Oil producers in the Middle East account for around a third of the world's oil supply, the bank added.

It's worth noting that oil price shocks stemming from conflict are typically short-lasting. In a separate note, JPMorgan found that most conflicts involving Israel over the last 58 years didn't lead to a lasting impact on oil prices, despite an immediate price shock.

Fed Chair Jerome Powell also nodded to the temporary effects of supply shocks at the central bank's last policy meeting.

"Those things don't generally tend to have lasting effects on inflation," Powell said in response to a question about oil prices, adding that the US economy had become less dependent on foreign oil in recent decades.

But Trump, who also made lower gas prices for Americans a key tenet of his campaign, appeared to be aware of the risks. The president demanded that oil prices stay low in a post on Truth Social on Monday.

"EVERYONE, KEEP OIL PRICES DOWN. I'M WATCHING!," the president wrote in his post.

The comment came after a series of posts following the Fed's rate decision last week, when the president slammed the central bank chief for being "too late" and ordered the equivalent of 10 quarter-point rate cuts.