The US Federal Reserve will likely continue pausing rate cuts on Wednesday, but the conflict between Israel and Iran could change their position in the meeting. Owing to the contradictory assessments from American intelligence and Israeli military action, economic analysts see the geopolitical tensions forcing the Fed into an earlier-than-expected rate cut.
Tensions between the two Middle Eastern nations grew last week after the Israelis and Iranians exchanged airstrikes. Israeli officials had said the strikes were necessary to halt what they claimed was Iran’s imminent progress toward nuclear weapon capability.
According to a Tuesday CNN exclusive, multiple US intelligence assessments contradicting Israel’s claim indicate Iran is not actively pursuing a nuclear weapon. The publication’s report, citing at least four individuals familiar with the matter, stated the country is up to three years away from being able to develop and deploy one.
Conflicting assessment of Iran’s nuclear capabilities
Sources inside the US government, including a senior defense official, told CNN that Tehran is “about as close as you can get before building” a weapon, but had not crossed that line yet. The US assessments concluded Iran has the materials and technology necessary, although no political decision was made to build a nuclear device.
Last week’s Israeli Air Force strikes significantly damaged the Natanz facility, home to uranium enrichment centrifuges, but the heavily fortified Fordow site was untouched. Defense analysts explained that Israel is unable to destroy deep-underground facilities without US military-grade munitions and aerial support.
Trump administration struggles with balancing act
President Donald Trump, currently back in the US after attending the G7 Summit in Canada, has asked both Iran and Israel to begin talks “before it’s too late,” while insisting America was not involved in any of the strikes.
“We’re not involved in it. It’s possible we could get involved. But we are not at this moment involved,” he told ABC News.
Privately, administration officials admitted only the United States possesses the capability to neutralize Iran’s underground nuclear infrastructure. This includes specialized bombs that can penetrate reinforced bunkers and the B-2 stealth bombers needed to deliver them.
Oil prices surge, Fed looking to balance inflation and market growth
On Tuesday, international benchmark Brent crude rose to approximately $74 per barrel after President Trump threw out the idea of a ceasefire, saying he wants a “real end” to the feud.
“I’m not looking for a ceasefire, we’re looking at better than a ceasefire,” the POTUS said after landing back in the US, post-G7 summit.
The jump reversed Monday’s market optimism when reports from the Wall Street Journal suggested tensions were cooling, which led to a brief rally in US equities and a pause in oil’s upward trend.
Oxford Economics Chief US Economist Ryan Sweet said in a client note that a “sustained rise in oil prices could cause the Fed to strike a more dovish tone,” especially if the price surge cuts into consumer demand and begins to weaken the labor market.
The Fed tends to look past short-term energy price volatility. Yet, Sweet noted that the current economic backdrop is fragile.
Analysts warn that if the conflict escalates and results in the closure of the critical Strait of Hormuz, oil prices could spike as high as $130 per barrel. This would likely drive US inflation closer to 6%, diminishing any progress in cooling consumer prices.
The Consumer Price Index (CPI) for May showed gas prices had fallen 12% year-over-year, contributing to a 1% month-over-month decline in the energy index. A reversal of that trend could push the Fed to delay any rate cuts until early 2026.
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