By Howard Schneider
WASHINGTON, March 2 (Reuters) – The U.S. economy, which has weathered a year of trade, immigration and other shocks, is facing new tests that are likely to stoke uncertainty after President Donald Trump’s decision to launch open strikes against Iran in a bid to topple the Middle Eastern country’s long-ruling Islamist government.
With retaliatory strikes across the region and Trump saying the conflict could drag on for weeks, analysts focused on an increasingly long list of unacceptably high prices as oil prices surged from $70 to nearly $80 a barrel over the weekend and shipments through the strategic Strait of Hormuz oil route plummeted.
Although the United States has been hit harder than most of its allies by energy shocks due to domestic oil and gas production, the global impact on trade, prices and investment could backfire and undermine what had been an upbeat growth outlook for this year.
A recent Conference Board survey showed that CEOs’ confidence in the outlook for the U.S. economy and their specific industries has increased, but nearly 60% said there is a high risk of geopolitical pressures being a disruptive force. The World Bank described the outlook for the U.S. economy as “upbeat” in its latest review, an assessment that it will now survive the turmoil of an unexpected conflict in a key oil region, which is affecting global shipping, supply chains, and commodity prices.
“One pillar of our 2026 vision has been the easing of caution on US policy. Last year’s data suggested that businesses are moving past the paralysis in hiring and non-technical capex (capital spending) and are beginning to deploy their flexible profits and capital,” Joseph Lupgun wrote in the Over. A week after the US bombing of Iran began. “This new recovery is now at risk. A military conflict on top of the ongoing US war, a war on trade, could reignite concerns about global stability.”
The extent of this impact, and whether, for example, it affects the Federal Reserve’s monetary policy, depends on how much the conflict raises international oil prices, and whether it threatens to intensify and expand over time or develop into Iran’s internal power struggle after the assassination of Supreme Leader Ali Khamenei in an airstrike.
Russia’s invasion of Ukraine in 2022 also created similar international risks. The U.S. central bank’s initial response to the dispute was tepid, as officials backed off plans for a major initial interest rate hike in the spring.
The Fed’s concerns quickly returned to the pace of inflation, however, and rate hikes accelerated.
“The conflict with Iran is a wild card, although markets quickly lose interest if the situation appears to be shifting from a regional to an internal conflict,” Tim Dave, chief U.S. economist at SGH Macro Advisors, wrote on Monday.
On a separate note, SGH President and CEO Sasan Gharmani, a native of Tehran whose father was an Iranian diplomat before the 1979 Islamic Revolution, cited the current uncertainty of the possibility of an Iranian civil war as well as Tehran’s “scorched earth” tactics to end (the global economy and other pressures to end the civil war).
Risk of a long-term asymmetric campaign
There appears to be an initial market effect involved. Interest rate futures were little changed on expectations that the Fed will cut rates at its July 28-29 and September 15-16 meetings. Yields on the 2-year U.S. Treasury note fell over the weekend, a common reaction in moments of global recession as investors seek safe-haven assets, but yields on Treasuries rose on Monday in a possible sign of concern about rising inflation, at least globally. The dollar, another safe-haven, rose against a basket of major currencies. Major US stock indexes were mixed in late morning trade.
“We do not expect geopolitical developments to have a significant impact on the Fed’s policy rate plans, with less potential risk to inflation offset by less supportive fiscal conditions” and a focus on domestic data, Citi analysts wrote in a note on Monday. “We expect 55,000 new jobs and 4.4% unemployment on Friday, a reading that should keep Fed officials optimistic that labor markets are stabilizing.”
The US Labor Department will release its employment report for February on Friday.
Jason Thomas, head of global research and investment strategy at Carlyle, however, notes the difficulty of predicting where the Middle East conflict will lead.
He has only a 30% chance for Trump to succeed in replacing the current Iranian regime, with the Islamic Revolutionary Guard Corps likely to pursue an “asymmetrical” response that may extend beyond obvious points like the Strait of Hormuz.
Iranian drones have targeted natural gas facilities in Qatar, causing it to shut down LNG production from facilities that use the strait.
But Thomas said he was “focusing on a 70% or higher base case probability for a long-term asymmetric campaign, including cyber activity, terrorism and proxy forces that could attack Iraq, the second largest producer in OPEC.” Although US power is centered around Iran, “Who’s Protecting Mozambique’s LNG?” he asked.
(Reporting by Howard Schneider; Editing by Paul Simau)
