Analysts Warn: Escalating US-Iran Conflict Rekindles Inflation Concerns; Fed's Hawkish Stance Unlikely to Ease

According to Zhitong Finance APP, analysts stated that the escalation of tensions between the US and Iran has pushed up oil prices, reigniting inflation concerns and further supporting the Federal Reserve's continued hawkish tone. Currently, the market views September as the key window for the Fed's next rate hike.

BlackRock estimates that this conflict will increase the global overall inflation rate by about 0.8 percentage points, though the impact varies by region.

BlackRock noted in a report that Europe and some regions in Asia are more dependent on energy imports and are therefore more susceptible to global inflation pressures.

OCBC Bank analysts agreed with this view, stating, "Given that labor market data suggests the economy is stabilizing rather than deteriorating, a new energy shock will make the Fed even more focused on inflation upside risks."

Yung-Yu Ma, Chief Investment Strategist at PNC Asset Management, said that while the rising profit margins of US small and mid-cap companies are a positive trend, "it is uncertain whether these trends can withstand several quarters of higher oil prices and persistent inflationary pressures."

Ma believes the Federal Reserve’s hawkish stance "will persist" until inflationary pressures in the energy market, oil market, and other areas begin to subside—pressures that have already started to rise again.

He stated, "We must consider building a balanced investment portfolio to diversify some of the risks."

Fed Officials Intensively “Turn Hawkish”; September Becomes Key Rate Hike Window

Against the backdrop of unrest in the Middle East, several Federal Reserve officials last week expressed much stronger concerns about rising prices.

Lorie Logan, 2026 FOMC voting member and President of the Dallas Fed, became the first Fed official to call for a rate hike, stating that inflation does not appear to be steadily returning to the Fed's 2% target. Kansas City Fed President Jeffrey Schmid also stated that, given the likelihood of rising inflation risks in the coming months, inflation is his primary concern at present. Although US inflation data for June beat market expectations, Schmid warned that it is too early to conclude that inflation is now on a downward trend.

Fed Vice Chair Philip Jefferson also stated that if inflation does not cool soon, the Fed should consider raising rates, but he also indicated that the current monetary policy stance is appropriate.

Notably, new Fed Chair Kevin Walsh said in his congressional testimony last week that policymakers have “zero tolerance” for high inflation and promised to restore price stability, though he did not explicitly state support for a rate hike.

The next Federal Reserve monetary policy meeting will be held from July 28-29. Fed officials will enter their customary blackout period this week, leaving the market with no new policy signals during that time.

While some officials are concerned about high inflation and have hinted at the possibility of rate hikes, the market currently widely expects the Fed to keep rates unchanged at the July meeting.

According to the Chicago Mercantile Exchange (CME) “FedWatch” tool, traders currently see an 83% probability that the Federal Reserve will keep rates unchanged in July, with the next rate hike window widely expected to shift to September or October. The probability of a 25 basis point rate hike by the Fed in September is now over 50%.