Iran War Puts Fed's Patience to the Test as Oil Prices Remain High

The ongoing war in Iran is causing uncertainty and pressure on oil prices, testing the Federal Reserve's patience in raising interest rates. Despite high energy prices that have persisted for months, the Fed has continued to look through this shock, assuming prices will eventually normalize.

However, as the conflict with Iran enters its seventh month, it's becoming increasingly difficult for the Fed to justify their wait-and-see approach. Oil prices have dipped slightly from the highs of over $100 a barrel but remain well above pre-war levels and surpassed $90 after renewed fighting this week.

Mark Williams, a finance lecturer at Boston University's Questrom School of Business and former bank examiner at the Fed, believes that the war is causing embedded inflation in the economy. 'Maybe it is our reality that uncertainty will continue, energy prices will continue higher, inflation will be more embedded in our economy,' he said.

Fed officials are divided on whether to raise rates, with some pushing for an increase while others, like Treasury Secretary Scott Bessent, argue that the Fed should stay on hold. 'It is my belief that we've seen a supply shock... Traditionally, you don't raise into a supply shock unless you see second- or third-order effects,' Bessent said.