President Trump warns that more US troops will likely die in Iran conflict
President Donald Trump confirmed the deaths of three American soldiers in Iran and warned that “many more will probably die.”
Oil prices soared and global stocks slumped in the aftermath of the U.S. and Israeli strikes in response to Iranian retaliation, but economists say the war is unlikely to have a major impact on the Federal Reserve’s future interest rate decisions.
So far, the war that killed Iran’s supreme leader Ayatollah Khamenei has, The disruption to traffic through the Strait of Hormuz is expected to mean higher gasoline prices for U.S. consumers and potentially increased volatility in financial markets.
While analysts are watching for signs that higher energy costs mean higher inflation, Tom Porcelli, chief economist at Wells Fargo, said the war is creating a supply-driven oil price shock, exactly the kind of spike the Federal Reserve is “looking for” when setting interest rates.
“Barring a prolonged war or major, long-term disruption to key shipping routes in the Strait of Hormuz, the impact on U.S. economic growth, inflation, and monetary policy should be modest,” Porcelli said in a special commentary on March 2, adding that the situation is fluid. “Of course, the opposite is also possible.”
What U.S. consumers can expect
U.S. consumers may have been expecting lower gas prices given recent activity in Venezuela, but are now drawing the natural conclusion that prices could rise, said Shika Jain, partner and head of North American consumer at commercial strategy consulting firm Simon Kuchar.
Jayne said she doesn’t think the war will cause panic buying of gasoline or grocery store items, although it may be too early to know.
“You might start to see people trying to fill up their cars as much as possible, but what else can they do?” Jayne said. “It’s not like you’re suddenly going to put a tank in your house or a barrel of gas in your house.”
Only time will tell whether there will be lines at gas stations like there were during the COVID-19 pandemic, she said. But the difference back then was that people were preparing for lockdown with so many unknowns, she added.
President Donald Trump said he expected the operation to last four to five weeks, but that the U.S. military has “the ability to operate much longer than that.”
Wayne Winegarden, a senior economics fellow at the Pacific Institute, said schedules are critical. Weingarten said if the war is short and Iran’s new leadership is able to reach a deal with the United States and Israel, American consumers could see higher gasoline prices for several weeks.
He said if the war dragged on or escalated, U.S. consumers could see higher energy costs and the U.S. economy could head toward stagflation.
“That’s what’s so scary about it,” Weingarden said. “Both are possible.”
What does a war with Iran mean for the Federal Reserve?
The Federal Open Market Committee’s next meeting is scheduled for March 17-18, giving officials several weeks to determine whether the Iran war actually represents an end to the oil shock or a new factor contributing to sustained inflation.
An internal Fed document released last year as part of the central bank’s Financial and Economic Discussion Series found that Russia’s invasion of Ukraine, which disrupted oil markets, along with the coronavirus pandemic, were the main drivers of the U.S. inflation spike from 2020 to 2023.
So far, Porcelli said the Iran war is unlikely to have a major impact on the Fed’s future interest rate decisions.
“Higher oil prices will cause higher headline inflation, but this will be driven by supply shocks rather than overly hot aggregate demand,” Porcelli said in a note. “Tightening monetary policy will therefore do little to alleviate the rise in inflation and will instead worsen the hit to economic growth.”
But Porcelli added that as the war continues, Fed officials are likely to be sensitive to deviations in inflation expectations. “But again, if we unberth here, it will be due to a prolonged war and persistently high energy prices,” he says.
For now, Fed officials are likely to take a wait-and-see approach depending on the data, said Ryan Sweet, chief global economist, and Ben May, director of global macro research at Oxford Economics.
Weingarten told USA TODAY that the war has increased expectations that the Fed will keep rates unchanged “because of all the uncertainty.” As of March 2, forecasters expect the FOMC to keep the benchmark interest rate unchanged at its next meeting in a range of 3.5% to 3.75%.
How will a war with Iran affect supply chains?
Markets were closely watching developments in the war over the weekend, as Iran supplies about 4% of the world’s oil and controls the Strait of Hormuz.
Disruptions in oil supply could push prices higher, but historically some geopolitical shocks have resulted in temporary spikes and limited market impact, said Angelo Kourkafas, senior global investment strategist at Edward Jones.
“Oil prices tend to rise in advance of these events. The market may have already priced in much of the risk, and prices could fall from here,” Kourkafas said in a report to USA TODAY, adding that the global oil market is oversupplied. “Structural changes, such as the U.S. becoming a net oil exporter and the economy becoming less energy intensive, also provide resilience.”
Jain said rising gas prices could lead to higher material costs, which businesses would have to bear and could be passed on to consumers.
Gasoline prices are probably the number one concern for consumers right now, Jain said, “but if this escalates, we might see some different patterns.”
Air cargo networks are also facing constraints, with FedEx suspending flights to and from Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and the United Arab Emirates due to safety concerns.
These planes, like trains, cars, and manufacturing equipment, all rely on oil and gas to run.
“Everything that moves from point A to point B to get to the end of the supply chain is affected by this,” said Amanda Oren, vice president of grocery industry strategy at RELEX.
