Iran Conflict Tests Fed's Patience on Interest Rates

The ongoing conflict between Iran and other countries is putting pressure on oil prices, which have been above pre-war levels for months. Despite dipping from highs of over $100 a barrel during the peak of the conflict, prices remain well above pre-war levels and recently surpassed $90.

The Federal Reserve has been trying to look past this energy shock, but it's getting harder as inflation remains stubbornly above its target of 2%. Central banks typically look through energy shocks, assuming that prices will eventually normalize. However, the conflict with Iran is dragging into a seventh month, and officials are questioning how long they can continue to ignore the impact on inflation.

Treasury Secretary Scott Bessent believes that recent inflation data shows that the Fed should stay on hold, citing supply shocks as the cause of higher prices. However, more Fed officials have been pushing for rate increases in recent months, with three dissenting from the July pause in favor of an increase.

Fed governor Michael Barr stated that rates may need to go up unless new data shows price pressures are easing. Markets saw the odds of a quarter-point rate hike increase after Warsh's speech last week in Jackson Hole, with investors pricing the chance of a hike at around 66% as of Wednesday.