Iran War Tests Fed Patience as Oil Prices Climb Above $90

The ongoing war in Iran is testing the Federal Reserve's ability to look past higher energy prices without raising interest rates. The conflict has dragged on for seven months with no clear resolution, causing oil prices to remain above pre-war levels and surpass $90 per barrel after renewed fighting this week.

Central banks typically ignore energy shocks, assuming that prices will normalize over time and that raising rates would slow an economy already affected by higher oil prices. However, it is becoming increasingly difficult for the Fed to do so as inflation remains above its 2% target, with 'core' measures - which strip out volatile food and energy costs - also being firmer than expected.

The Fed has been hesitant to raise rates despite growing pressure from officials who believe that action is necessary to address embedded inflation. Treasury Secretary Scott Bessent indicated this week that recent inflation data shows the Fed should stay on hold, citing a 'supply shock' and restrained core inflation.

However, more Fed officials have been pushing for rate increases in recent months, with three dissenting from July's continued pause in favor of an increase. Fed governor Michael Barr said rates may need to go up unless new data shows price pressures are easing.