Iran War Tests Fed's Patience on Interest Rates

The war in Iran is testing how long the Federal Reserve can ignore higher energy prices without raising interest rates. Central banks typically look through energy shocks, but it's getting harder for the Fed to do so as oil prices remain high and inflation persists.

Oil prices have surpassed $90 a barrel after renewed fighting this week, and have climbed since the war started due to traffic disruptions in the Strait of Hormuz. This has raised concerns about whether what started as a shock is becoming a more persistent source of inflation.

Mark Williams, a finance lecturer at Boston University's Questrom School of Business and former bank examiner at the Fed, said that maybe it's time for the Fed to do its job and increase interest rates. 'The risk at this point of not doing anything is much greater than the risk of doing something,' he added.

However, Treasury Secretary Scott Bessent indicated that recent inflation data was evidence the Fed should stay on hold, citing a supply shock. Fed governor Michael Barr said that rates may need to go up unless new data shows price pressures are easing.