After Donald Trump said the U.S. and Iran were negotiating a “total resolution” of the Middle East hostilities, despite having threatened attacks on Iranian power plants over the weekend, S&P 500, Nasdaq, and Dow Jones futures rose, along with gold and cryptocurrencies, while oil prices and Treasury yields fell sharply.
The problem is that this optimism could be short-lived, as Iran has denied any negotiations with Washington, and the closure of the Strait of Hormuz — along with news that the U.S. is sending thousands of additional Marines and sailors to the region — suggests that no real de-escalation has occurred.
And if the conflict drags on?
Besides the rising number of casualties and infrastructure damage, the main risk is a spike in inflation from high energy prices, which drive the cost of most goods and services, along with disruptions to helium and aluminum supplies, and, even more concerning, roughly a third of global fertilizer production.
And judging by last week’s central bank meetings, regulators are starting to prepare for the worst.
The Federal Reserve has revised its 2026 inflation forecast upward, from 2.4% to 2.7%. Rate projections remain unchanged, though the estimate of the neutral rate has edged up slightly, from 3% to 3.1%. Some FOMC members have even discussed the possibility of rate hikes, though that is not the base case.
In Europe, several officials at the European Central Bank have mentioned the possibility of a rate hike as early as April, and in a stress scenario, inflation could reach 6.3% within a year. The Bank of England is moving in a similar direction. Meanwhile, Australia has already raised rates again by 25 basis points to 4.1%.
What if the conflict ends in the next week or two?
The Eurozone’s preliminary Composite PMI for March fell to 50.5, showing slower overall private sector growth, driven by a sharp drop in services activity to 50.1. This suggests that some damage has already been done from higher energy prices and supply chain disruptions caused by the Middle East conflict.
Fitch Ratings warns that if the Strait of Hormuz remains closed until June, sustained high energy prices, tighter financial conditions, and slower global growth could put serious pressure on credit ratings across multiple sectors. In other words, the energy crisis could potentially trigger systemic issues.
If the conflict ends soon, these risks would diminish, giving markets a chance to recover.
This article was written by IL Contributors at investinglive.com.
