The intersection of fiscal policy, monetary conditions, and political control of Congress has long been a subject of debate among political and market pundits. As the United States approaches the November 2026 midterm elections, we decided to examine this issue from a nonpartisan perspective. Prediction markets such as Polymarket and Kalshi currently assign a high probability—roughly 82% to 85%—that Democrats will gain control of the House of Representatives and potentially retake the Senate. Sadly, in a recent You.Gov poll, only 25% of Americans (from both political parties) today believe that the U.S. midterm elections will be conducted fairly, down from 44% in 2024.

While the Federal Reserve formally controls short-term interest rates through the federal funds rate, Congress plays a consequential indirect role through fiscal policy, regulatory frameworks, and deficit dynamics that will impact inflation and, by extension, monetary policy decisions.

The Past 50 Years

Looking back over the 50 years from 1976 through 2025, distinct patterns of inflation, as measured by the Consumer Price Index, and the federal funds rate emerge across different configurations of congressional control. When Democrats controlled the House of Representatives, average CPI inflation was approximately 4.76%, while the average federal funds rate stood at 6.13%. When Republicans controlled the House of Representatives, those averages were significantly lower, with inflation at 2.39% and the federal funds rate at 2.92%.

Source: U.S. House of Representatives History Archives, the Board of Governors of the Federal Reserve System, and the Bureau of Labor Statistics

A similar, though less pronounced, pattern appears in the Senate. Democratic Senate control corresponded with an average inflation of 4.40% and a federal funds rate of 4.41%. In contrast, Republican control saw an average inflation average 2.89% alongside a somewhat higher federal funds rate of 4.91%.

Source: U.S. Senate Historical Office, the Board of Governors of the Federal Reserve System, and the Bureau of Labor Statistics

At first glance, these figures might suggest a straightforward relationship between party control and macroeconomic outcomes. Still, we would be remiss not to place these results in the context of what else was happening at the time. The elevated inflation and interest rate environment associated with Democratic House control was largely driven by the period (e.g., the 1970s and 1980s) often referred to as the “Great Inflation.” During that time, inflation reached double digits, driven by rising oil prices, prompting aggressive monetary tightening under Federal Reserve leadership to restore price stability. Because Democrats controlled the House continuously from 1976 through 1994, those high-inflation years disproportionately influenced the long-term averages. Still, we leave it to the readers to decide whether the oil embargo and the quadrupling of oil prices were due to the policies of the political party in power.

By contrast, Republican control of the House beginning in 1995 coincided with what economists call the “Great Moderation,” a period of relatively stable growth, low inflation, and declining interest rates. This period extended into the post-2008 financial crisis era, when the Federal Reserve kept rates near zero for an extended period. As a result, the lower inflation and interest rate averages under Republican House control reflect not only policy differences but also favorable macroeconomic timing. Again, in the interest of fairness, we leave it to the reader to decide whether the policies of the political party in power that led to the global financial crisis and lower interest rates were partially responsible for those events.

The Last 20 Years

A more contemporary lens can be applied by examining the past 20 years, from 2006 to 2025. In this shorter timeframe, the differences between parties narrow considerably and, in some cases, reverse. Under Democratic House control, inflation averaged roughly 3.0%, compared with about 2.3% under Republican control. However, the average federal funds rate was lower under Democratic House leadership, reflecting that Democrats held the chamber during both the aftermath of the 2008 financial crisis and the early stages of the COVID-19 pandemic, when interest rates were near the zero lower bound. In contrast, Republicans controlled the House during periods when the Federal Reserve was normalizing or raising rates, including the more recent tightening cycle. During this controversial period, we leave it to the reader to decide how much credit or blame to assign to either political party for handling the after-effects of the global pandemic, which led to a zero interest rate policy environment.

The Senate data over the past 20 years shows similar nuance. Inflation averaged just above 3% under Democratic Senate control, compared with under 2% under Republican control. Meanwhile, the federal funds rate averaged slightly lower under Democrats than under Republicans, though the gap is modest. These differences are heavily influenced by the timing of economic shocks, particularly the 2021–2022 inflation surge, which occurred under unified Democratic control of Congress and contributed to a higher average inflation figure for that period. Here, the lines of opinion are well known, with critics blaming Democrats for going well beyond their course of duty to stimulate the economy during the pandemic, while others argue that during a period of uncertainty, the country was justified in erring on the side of caution, even if it meant fanning the flames of inflation, which led to higher inflation and higher short-term interest rates.

As of early 2026, the macroeconomic environment sits somewhere between the extremes of the past. The federal funds effective rate is approximately 3.6%, while year-over-year CPI inflation stands at 3.3%. Projections from the Congressional Budget Office suggest that inflation will gradually decline toward the high-2% range by the end of 2026, even as fiscal deficits remain historically elevated. This baseline provides a useful starting point for considering how different congressional outcomes might influence the trajectory of inflation and interest rates.

If Democrats were to gain control of the House and potentially the Senate, historical patterns suggest that markets might anticipate somewhat higher average inflation under Democratic control than under Republican control, though not necessarily at the levels implied by the 50-year averages.

Democratic fiscal policy has often emphasized higher levels of government spending, particularly in areas such as infrastructure, social programs, and industrial policy. In contrast, higher levels of defense spending may be associated with Republicans, which can determine the trajectory of government spending, as the President has requested a $500 billion increase, representing a 50% increase in defense spending, plus increased spending authorization to finance the U.S.-Iran conflict.

Increased fiscal spending by either political party, whether for social programs or the U.S. war effort, can lead to larger budget deficits, which will affect Treasury issuance and interest rates. Higher deficits can put upward pressure on long-term interest rates, independent of Federal Reserve actions, by increasing the supply of government debt that investors must absorb. If Kevin Warsh is successfully nominated as the next Fed Chair, the hike in interest rates may occur at the short end of the yield curve, as he hinted during his Congressional nomination hearings that he would favor the Fed shifting its holdings from long-term to short-term Treasury securities.

What Happens During Periods of a Divided Government?

One of the most important considerations for the upcoming midterms is the likelihood of a divided government. Historically, periods when one party controls Congress while the other holds the presidency have often led to more constrained fiscal policy. Legislative gridlock can limit the size and scope of new spending initiatives, which in turn may reduce the risk of demand-driven inflation. For financial markets, divided government is sometimes associated with greater predictability, as major policy shifts become less likely.

Summary and Concluding Thoughts

Historical data suggest that under Republican control of one or both chambers, average inflation tends to be lower, particularly over the 50-year and 20-year horizons. This pattern is often linked to a policy mix that emphasizes fiscal restraint, slower growth in government spending, and, in some cases, tax policies designed to encourage private-sector investment. From a macroeconomic perspective, such policies may exert less direct upward pressure on aggregate demand, contributing to more moderate inflation outcomes.

Interestingly, the relationship between Republican control and the federal funds rate is less straightforward. Over the past 50 years, Republican Senate control has been associated with higher average interest rates than Democratic control. In the more recent 20-year period, however, Republican control has coincided with slightly higher average interest rates. Of course, this pattern could change as President Trump has made clear that any Fed Chair he nominates must support lower short-term interest rates.

If current prediction market probabilities hold and Democrats take the House while the Senate remains competitive, a divided government remains a possibility. In that case, the impact on inflation and interest rates may be more muted than historical averages under unified Democratic control would suggest. Fiscal policy might expand in targeted areas but face constraints elsewhere, leading to a more balanced overall effect on aggregate demand.

As the 2026 midterm elections approach, investors and policymakers alike are likely to focus on which party controls Congress and on the specific policy agenda that emerges from that control. In that sense, using our historical analysis, the upcoming elections should be viewed as a shift in the policy environment that will influence both inflation and short-term interest rates.

In my last Client presentation for the Federal Home Loan Bank, a client asked whether a war involving Iran could lead to the collapse of the Iranian government. Based on the research I have conducted, my nonpartisan response is that “it’s possible, but it’s not the most likely outcome right now.” From an economic and political perspective, countries usually don’t fall apart overnight. Even under heavy pressure—war, sanctions, inflation, or political unrest—many governments remain in power far longer than outsiders expect. The key question is not just how much stress Iran faces, but whether the core structure holding the country together begins to crack.

Based on my careful study of Iran, I find that the country’s structure centers on something simple yet powerful: control over the military, security forces, and intelligence services. In Iran, this includes the Islamic Revolutionary Guard Corps (IRGC), which has become the de facto governing body. Other groups jockeying for power include the Supreme National Security Council (SNSC) and surviving political figures who have maintained deep ties to the security establishment. Still, it is important to note that the IRGC has strengthened its grip over the powers previously held by the SNSC. But as long as these groups remain unified, the government can maintain order—even if the economy is struggling or the population is unhappy.

Although there are many views on the structure of Iran’s government, it’s easy to find inconsistencies in the prevailing consensus. At present, that view holds that if a country is bombed, sanctioned, or pushed hard enough, its government will collapse. So far, that hasn’t happened, which has led me to think outside the box. Most governments fall apart from the inside, not just because of external pressure. Based on what we have seen so far, this seems to be playing out in Iran.

If the group with guns and authority remains in control, the system will survive. Thus far, anecdotal evidence suggests that the power structure in Iran has been concentrated in a coalition of IRGC veterans, who have been described as more radical and less restrained than its previous leaders!

Another factor to consider is Iran’s geography and diversity. Iran is not a small or uniform country. It has different ethnic and regional groups, especially near its borders—Kurdish areas in the northwest, Baloch regions in the southeast, Arab populations in the southwest, and Azeri communities in the north.

If the central government weakens, certain regions might face localized violence or unrest. However, this does not imply a full-scale civil war across the country that could lead to a collapse of its regime. Many nations experience regional conflicts while their central governments remain operational. Therefore, if Iran encounters instability, it may begin in specific areas rather than spread nationwide all at once.

From an economic perspective, this distinction matters. A country with localized conflict is still very different from one that has completely collapsed. Markets, oil flows, trade routes, and investment decisions all respond differently depending on whether instability is contained or widespread.

From my observations, Iran also appears inherently resilient to pressure. Over the years, it has developed control systems—networks of loyalty, surveillance, and political influence—that support leadership continuity. While not flawless, these systems act as shock absorbers. During periods of stress, the government can reallocate resources to sustain control, sometimes at the expense of public services, political freedom, and even economic development. This is why economic hardship alone in Iran may not guarantee a civil war.

Even if inflation rises, the currency loses value, or jobs become scarce, the more common outcome is not collapse but tightening control. Iran has often responded to economic pain by cracking down harder rather than stepping aside. Governments rarely collapse just because people are unhappy. They fall only when those groups for enforcing order stop working together. Only when parts of the military or security services begin to act independently—or even oppose each other will Iran lose its ability to stay unified.

Another warning sign is the breakdown of basic services. If the government can no longer provide essentials such as electricity, fuel, food distribution, or healthcare, everyday life becomes much harder. This can fuel anger and unrest. Still, even this alone doesn’t guarantee a collapse, as this factor has been present in Iran for quite some time.

Instead, things will become dangerous only if all these problems occur at once: leadership confusion, divisions within the security forces, economic stress, and failing public services. Outside involvement can also make things worse if it’s not handled carefully. If foreign powers push for regime change without a clear plan for what comes next, they can unintentionally create a power vacuum and lead some to rally in support of the motherland, even if they are unsure whom they are supporting. When that happens, different groups—local militias, political factions, or even outside countries—may compete to take control.

This is what happened in places like Libya and Syria. These countries didn’t collapse simply because of protests or outside pressure. They collapsed because the central government lost control, and no stable system replaced it. That doesn’t guarantee Iran will follow the same path. Iran has a different history, stronger institutions, and a more established central government. But it does show how things can unravel if key pieces fall apart at the same time.

When we step back and look at all of this from a broader perspective, the most realistic conclusion is that the collapse of the Iranian regime is a risk, but not the most likely outcome. More likely scenarios include ongoing instability or a tougher, more restrictive government response that supports another group that grabs power in Iran. These outcomes would still carry serious economic consequences—higher inflation, slower growth, reduced investment, and greater pressure on everyday living standards. But they wouldn’t necessarily mean the country falls apart, as Iran was living under these conditions even before the war started.

Summary and Concluding Thoughts

For people trying to understand where things are headed in Iran, there are a few key warning signs to watch for. One is whether there are visible cracks within the IRGC or security forces. Even small signs of division at higher levels can be significant. Another is whether violence in border regions becomes more organized and sustained, rather than isolated incidents.

A third is whether there is uncertainty or conflict over who is in charge. If these warning signs remain limited, Iran is likely to remain intact, even if it faces serious challenges from the destructive effects of the war. But if they occur all at once, the likelihood of deeper instability will increase.

Iran’s future depends less on the level of external pressure it faces and more on whether its internal structure holds together. As long as the IRGC remains firmly in control and institutions remain aligned, the country is more likely to endure—even under difficult conditions. Only if those internal foundations begin to fracture will the situation shift rapidly and unpredictably.

The 2026 reconfiguration of U.S. trade policy—particularly the reaffirmation and expansion of Section 232 tariffs under the Trade Expansion Act of 1962 announced on April 2, 2026, and scheduled to go into effect on April 6, 2026 —marks a structural shift in how companies importing goods from Mexico and Canada must now assess tariff costs, compliance, and supply chain design. Firms operating in highly integrated North American industries such as automotive manufacturing, aerospace components, and healthcare capital equipment will now face tariff rates that depend heavily on rules of origin, material composition, and interpretations of national security risk. Such products will no longer carry the USMCA (U.S.-Mexico-Canada Agreement)-compliant protection they previously enjoyed. The goods in question will now be subject to tariffs listed in four Annexes associated with the new Proclamation.

These imported goods will be listed in multiple Annexes (e.g., I-A, I-B, II, III, and IV) and will be subject to a single Section 232 tariff rate (e.g., 50%, 25%, 15%, 10%, or 0.0%), meaning the tariffs will not stack. In general, the U.S. importer will pay the higher tariff rate on the full value of the imported product listed in the Annexes. If the metal content is 95% or more of U.S. origin, the importer will be subject to the lower 10% tariff rate on the full value of the good. Finally, under the “De Minimis rule,” if the product’s regulated metal weight is less than 15% of the product’s total weight, the U.S. importer will be exempt from tariffs.

Auto Manufacturers

For U.S. auto manufacturers importing auto parts (often considered derivative products) from Canada and Mexico, the April 6, 2026, Section 232 has created a transitional environment best described as a “waiting game,” in which tariff relief coexists with clear signals of tighter future enforcement. Previously, USMCA-compliant auto parts that met the 75% USMCA regional value content (RVC) and labor requirements were exempt from the 25 percent Section 232 tariff. However, this exemption is likely to end in July 2026, when the rollout of a new valuation and certification regime under development by the Department of Commerce and U.S. Customs and Border Protection begins. Once implemented, the treatment of parts is expected to converge with that of finished vehicles and to be subject to a 25% tariff on the full value of their non-U.S. content. That would include USMCA-compliant auto parts. In contrast, non-USMCA-compliant auto parts will face a 25% tariff on their full value.

Such forward-looking risk is already influencing the sourcing and compliance strategies of U.S. importers even before the rules formally change. Under prior rules, importers could isolate and pay duties only on the embedded steel or aluminum content that was not included in the USMCA-compliant content of the auto parts. That distinction will likely be eliminated. When the shift occurs (likely in July 2026), tariffs will apply to the “full value” of non-compliant components, including labor, engineering, and intellectual property. For parts with high-value labor inputs, which are common in modern automotive manufacturing, this will amplify the impact of tariffs and put non-compliant auto part suppliers at a structural disadvantage in the U.S. market.

This has prompted a proactive shift in supplier behavior. Automakers are increasingly pressuring Canadian and Mexican partners to use at least 95 percent U.S.-smelted or poured metal, which would result in a reduced 10 percent tariff rate rather than the full 25 percent once the exemption window closes. In this sense, the Annex framework, which sets tariff rates, is already reshaping upstream material sourcing decisions, even before the new tariff changes take effect.

To partially offset rising costs and preserve domestic assembly incentives, current policies for U.S. automakers importing car parts include an import adjustment mechanism tied to U.S. vehicle production. Automakers assembling vehicles domestically can claim a credit equal to 3.75 percent of a vehicle’s MSRP to help absorb the cost of imported parts. However, this relief is temporary and will be reduced to 2.5 percent on May 1, 2026. The goal is to increase urgency for automakers to realign their supply chains, as the buffer against higher input costs is set to erode quickly. For many firms, this creates a narrow window to optimize sourcing, renegotiate supplier contracts, and strengthen compliance systems before their margins face greater pressure.

Aerospace Components

This sector has long been known for its free trade agreements and sector-specific carve-outs for components used in civilian aviation. Under the updated Section 232 framework, which took effect on April 6, 2026, the new rules place greater emphasis on how a component is made—its “regulated metal” composition, weight profile, and end-use—rather than on where it is made. Under the new proclamation, a “regulated metal” for USMCA-compliant components will be defined by its material composition, namely the percentage of steel, aluminum, or copper used to construct the aerospace component, and by the origin of that metal.

These changes mean that USMCA-compliance alone will no longer be sufficient to avoid metal-related tariffs. U.S. companies importing these USMCA-compliant aerospace components must now maintain detailed documentation of weight and smelt-and-cast records to determine the actual tariff rate. One notable change is the elimination of the “metal content” valuation approach for setting tariff rates, in favor of a full customs value methodology. Under the old system, Section 232 tariffs applied only to the value of the regulated metal (e.g., steel, aluminum, or copper) in a component. Under the revised rule, the Annex-determined tariff rate applies to the product’s full value.

When an aerospace component is entirely or almost entirely composed of a regulated metal, the tariff will be 50% under Annex I-A. Other components with more than 15 percent regulated metal content by weight are generally categorized under Annex I-B and subject to a 25 percent tariff on full value. However, if the aerospace component uses at least 95% of U.S.-originated metal, the tariff rate drops to 10%. Annex III also provides a temporary 15 percent tariff cap for certain metal-intensive industrial equipment through 2027. U.S. importers must also evaluate whether their products fall within Annex II, which explicitly exempts a defined list of items, or Annex III, which provides a temporary 15 percent tariff cap. The tariff rate will also be set to 0.0% if the article appears on the Annex II exempt list.

Civilian aircraft and many associated components benefit from longstanding exemptions tied to international agreements, including the World Trade Organization’s Agreement on Trade in Civil Aircraft. These exemptions have been preserved in the April 2026 proclamations, reflecting the strategic importance of maintaining global interoperability and supply chain stability in aerospace manufacturing. However, not all aerospace components are covered by these exemptions. Parts that fall outside the scope of civil aircraft agreements and contain regulated metals will be subject to Section 232 tariffs.

For other aerospace components classified as a regulated derivative, the entire declared value of the imported component will be subject to the declared tariff rate listed in one of the Annexes. Because many of these aerospace components are high-value, precision-engineered parts in which raw materials account for a small share of the total cost, such changes will introduce a more granular classification process and dramatically increase the components’ effective tariff rates.

In contrast, aerospace components manufactured in Mexico or Canada using at least 95 percent U.S.-origin steel or aluminum may qualify for a reduced 10 percent tariff rate, creating a strong incentive to align upstream material sourcing with U.S. production. Additionally, the de minimis rule provides that aerospace components imported from Mexico or Canada containing less than 15 percent regulated metal by weight are generally excluded from Section 232 tariffs. These provisions effectively reward companies that can design products to minimize regulated metal content or those that embed a high proportion of U.S.-sourced inputs. Nonetheless, capturing these benefits requires rigorous bill-of-materials data, supplier certifications, and weight-based documentation that many firms previously did not need to maintain at this level of granularity.

As a result, aerospace components that are fully USMCA-compliant may still face tariffs if the imported goods fall under the Annex-based tiered classification system. This has introduced uncertainty and friction into what was once a highly integrated North American aerospace supply chain. For U.S. importers, the operational reality is clear: compliance now hinges on technical precision, rigorous documentation, and strategic sourcing decisions, with tariff exposure determined less by trade agreements and more by the physical and geographic origins of each component.

Healthcare Capital Equipment

Healthcare capital equipment operates within an environment of unique dynamics. Although medical devices and equipment were not the focus of the April 2026 metal tariff overhaul, they are still indirectly affected by changes to their material composition and supply networks. Many capital items—such as MRI machines, surgical robots, and diagnostic systems—use large quantities of steel and aluminum. If these products fall under Section 232 derivative categories, the full-value tariff method could significantly increase import costs.

Large, metal-intensive diagnostic and imaging systems imported from Mexico and Canada are often categorized under Annex III, where they benefit from a temporary 15 percent tariff cap through the end of 2027. While lower than the standard Annex I-B rate, this still represents a meaningful cost increase to these high-value capital goods. Conversely, smaller or less metal-intensive devices—such as monitoring equipment that utilizes large amounts of plastic —may qualify for Annex IV’s de minimis exemption if the regulated metal content remains below the 15 percent threshold. This creates a strong incentive for manufacturers to redesign products or reconfigure components to reduce metal weight where feasible. For importers, the key takeaway is that tariff exposure in this sector is highly sensitive to both engineering decisions and evolving policy priorities.

Taken together, the Annex-driven architecture of Section 232 transforms tariff compliance from a binary determination into a multidimensional optimization problem. For U.S. companies importing from Mexico and Canada, success now depends on granular visibility into material composition, rigorous supplier certification, and strategic alignment with U.S. sourcing incentives. The traditional advantages of North American integration under USMCA remain relevant but are increasingly conditional. In this environment, even small deviations in metal content or origin can shift a product from a 0.0% tariff rate under Annex IV to a 25 percent or higher tariff rate under Annex I-B or I-A.

Summary and Concluding Thoughts

As of April 6, 2026, imported auto parts, aerospace components, and health care equipment from Mexico or Canada (even if they are USMCA-compliant) will now be subject to a cornucopia of tariff rates (with a slight delay for auto parts). These tariffs will depend on the amount of regulated metals embedded in the product and on whether the metals were melted and poured or smelted and cast in the United States.

In contrast, products containing less than a 15% weight threshold of regulated metals may be excluded from tariffs altogether. These provisions will create opportunities for strategic sourcing and engineering adjustments, enabling companies to manage tariff exposure through material selection and supplier relationships.

However, implementing these strategies will impose a considerable administrative burden. While that will be manageable for large companies, it will be a herculean task for smaller ones. Companies will need to maintain comprehensive records of material sources, manufacturing processes, and value breakdowns. They must also stay up to date on evolving tariff classifications and enforcement procedures, which can shift quickly in response to policy changes.

From a macroeconomic perspective, the expansion of Section 232 tariffs reflects a broader reorientation of U.S. trade policy toward resilience and the protection of U.S. national security. By targeting metal-intensive industries and critical supply chains, the policy aims to incentivize onshoring and reduce reliance on foreign inputs. However, this strategy will come at the cost of greater complexity and, in many cases, higher input prices for U.S. manufacturers.

For companies importing from Mexico and Canada, the practical implication is the need for granular supply chain analysis. It is no longer sufficient to consider only the country of final assembly; firms must understand each component’s origin and composition, the applicability of USMCA rules, and potential exposure to Section 232 tariffs. In some cases, this may lead to reconfiguring supply chains, including greater localization within the United States or deeper integration within North America to meet origin thresholds.

To analyze this question from a nonpartisan perspective, we take a closer look at the energy flows affected by the closure of the Strait of Hormuz, long viewed as one of the most severe tail risks in global energy markets. However, the current U.S.-Iran conflict introduces critical risks, highlighted by the presence of large-scale Iranian floating storage estimated at 160 million barrels of oil or more. Whether imposed by Iran, the United States, or both, a blockade of the Strait of Hormuz would remove even more oil from the global market, including the 1.8 million barrels Iran has been exporting through it.

Of course, thanks to its floating oil storage, Iran could continue sending oil to China without interruption. With the closure of the Strait of Hormuz, the result would not be a uniform global disruption but a fragmented one in which some countries, particularly China, can partially insulate themselves. At the same time, the rest of the world will need to absorb the bulk of the supply deficit. Before the outbreak of hostilities on February 28, 2026, the Strait of Hormuz handled approximately 85 to 130 ships per day, serving as the central artery for roughly 20 million barrels per day of crude oil, petroleum products, and liquefied natural gas. Since the escalation of the conflict, however, maritime traffic has collapsed to fewer than 10 ships per day, with some days registering only one or two successful transits.

To assess the magnitude of the disruption, it is necessary to start with the pre-war baseline of approximately 20 million barrels per day passing through the Strait. In a full closure scenario, this volume would be at risk. However, not all of this supply is permanently lost. Saudi Arabia’s East-West pipeline, currently operating at about 7 million barrels per day, allows crude to bypass the Strait and reach the Red Sea. The United Arab Emirates contributes an additional 1.5 million barrels per day via the Habshan-Fujairah pipeline. Together, these alternative routes have diverted roughly 8.5 million barrels per day of supply.

Removing this bypass capacity from the pre-war baseline estimates a net shortfall of 11.5 million barrels of oil per day that cannot access global markets under current conditions. To be fair, the Chief Economist from VORTEXA, David Wech, estimates the shortfall at 13.4 million barrels of oil per day. These figures effectively measure the core supply gap compared to pre-war levels, highlighting the structural “hole” in the market that influences price formation. It also indicates the limited capacity of the current infrastructure to compensate for a closed Strait.

However, the introduction of Iran’s floating storage fundamentally alters how this deficit is distributed across the global economy. Current estimates suggest that Iran has accumulated between 160 million and 180 million barrels of crude and condensate stored on tankers. Importantly, about 100 million barrels of this volume are already positioned in waters near China, Malaysia, and Indonesia, outside the Strait of Hormuz’s geographic constraints. This strategic positioning will allow Iran to continue delivering oil to key customers, such as China, even if new exports from its ports are blocked.

At a sustained export rate of about 1.8 million barrels per day—the level Iran maintained before the U.S. naval blockade—this floating storage could theoretically supply its customers for roughly 88-90 days. An open question is whether the U.S. and the rest of the world can sit patiently and wait for this floating storage to be absorbed before the blockade starts to really hurt Iran. In practical terms, this means Iran can continue to meet most of its export commitments through mid-summer 2026 without loading a single additional barrel from its domestic terminals. For China, which accounts for most of Iran’s oil exports, this represents a significant buffer against the immediate effects of the blockade.

This dynamic introduces a critical asymmetry into the global energy system. While the broader market faces an 11.5 million barrel-per-day shortfall, a portion of demand, China would be temporarily insulated by access to pre-positioned Iranian supply. In effect, floating storage acts as a time-shifting mechanism, delaying the impact of the blockade for certain buyers while intensifying it for others. However, since the global price of oil is set on the global market, even if some consumers are shielded, the overall deficit will continue to exert a punishing upward pressure on prices in the United States and within many other countries!

While a naval blockade can prevent new oil from leaving Iranian ports, it cannot easily intercept or sanction cargoes already at sea, especially when they are transferred through opaque trading networks or delivered to non-participating countries. As a result, Iran can continue generating revenue, even at a discount, despite the formal constraints imposed by the blockade of the Strait of Hormuz!

From a quantitative perspective, including Iranian floating storage does not eliminate the 11.5 million-barrel-per-day global deficit; rather, it redistributes the deficit’s effects over time and across regions. If Iran continues to supply 1.8 million barrels per day from storage, the immediate global shortfall may resemble what we have seen over the past 6 weeks. However, this is a finite buffer. Once the floating inventory is depleted, the full impact of the blockade reasserts itself unless alternative supply sources emerge.

This temporal dimension is critical to understanding market behavior. In the near term, oil prices may reflect a structural deficit and perceived mitigation from Iranian storage. As the market approaches the depletion horizon—estimated at around 90 days—the risk premium embedded in prices may rise further, reflecting anticipated supply tightening once the buffer is exhausted.

The role of natural gas adds complexity, particularly when assessing the United States’ position as a net energy exporter. On a crude oil basis, the United States remains a net importer, importing about 6.2 million barrels of oil per day —primarily heavy crude—while exporting about 4.0 million barrels of light shale oil per day. This results in a net oil crude deficit of roughly 2.2 million barrels per day.

However, when refined petroleum products are included, the United States is a modest net exporter of about 1.6 million barrels per day. Broadening our horizon further, with net exports of natural gas of roughly 12.6 to 13.0 billion cubic feet per day and using a conversion factor of approximately 5,800 to 6,000 cubic feet per barrel of oil equivalent, natural gas adds roughly 2.2 million barrels (surplus) of oil equivalent per day to the U.S. energy balance.

When all energy categories—including coal—are combined, the United States is a net exporter of approximately 4.4 million barrels (surplus) of oil equivalent per day. This broader measure reflects our total energy surplus but does not insulate the United States from global oil price shocks. Oil remains a globally traded commodity, and prices are set internationally. Consequently, even as a net energy exporter, the United States experiences the same upward pressure on gasoline and diesel prices as other consuming nations.

This reveals a central paradox in the current environment. Despite its aggregate energy surplus, the United States cannot offset a global supply deficit of 11.5 million barrels per day. Even if it redirected all its net exports to the global market, the scale of the disruption would far exceed its capacity to compensate for it. Moreover, structural constraints—such as refinery configurations optimized for heavy crude—limit the substitutability of domestic production.

Summary and Concluding Thoughts

From a macroeconomic perspective, the persistence of a large supply deficit, even with Iranian floating storage temporarily cushioning certain markets, implies continued upward pressure on oil prices. This, in turn, contributes to broader inflationary dynamics, influences monetary policy decisions, and increases the likelihood of demand destruction as consumers and businesses adjust to higher energy costs.

The inclusion of floating storage in the analysis does not fundamentally alter the conclusion that the closure of the Strait of Hormuz is a deeply disruptive event for the global economy. It does, however, change the pathway through which that disruption unfolds. Rather than a uniform, immediate shock, the market undergoes a staggered adjustment, with some regions benefiting from temporary buffers while others face acute shortages. In this sense, the question of whether maintaining the Strait’s closure is strategically beneficial or economically damaging does not have a simple answer, and we leave it to the reader to reach their own conclusions after reviewing all the facts.

The blockade may achieve specific geopolitical objectives, such as forcing Iran to liquidate its floating storage or pressuring other countries to join the U.S. in a coalition against Iran. At the same time, it imposes high costs on the global economy, including on the very countries enforcing it. Iranian floating storage further complicates this assessment by enabling partial circumvention of the blockade’s intended effects.

Ultimately, the global energy system remains constrained by a structural deficit that alternative infrastructure and temporary buffers can only partially mitigate. As long as at least 11.5 million barrels of oil per day of supply remains stranded, upward pressure on oil prices will persist. Iran’s floating storage may delay the full impact for certain buyers, but it does not resolve the underlying imbalance. The longer the Strait of Hormuz remains closed, the more pronounced these dynamics become, shaping not only energy markets but also the broader trajectory of the global economy.

The inflation debate surrounding the U.S.–Iran war is quickly falling into a familiar pattern: one side points to sharply rising gasoline prices, claiming inflation is surging again, while the other points to lower “real-time” measures and insists inflation is cooling. For a cynical audience used to data being weaponized, our nonpartisan approach analyzes how the metrics are built rather than arguing over which headline number feels more politically convenient.

Source: U.S. Energy Information Administration

Truflation (T) Metric

Let’s start with the facts. The U.S.–Iran conflict has unquestionably triggered immediate price shocks in energy markets. Regular-grade gasoline prices have surged by about 40.3% since hostilities began, with national averages hovering around $4.12 per gallon as of April 7, 2026. Diesel prices have climbed even more sharply, raising transportation and logistics costs across the economy. Fertilizer prices and the raw materials (e.g., Urea) used to produce it have jumped by 50% or more due to disruptions in the Strait of Hormuz, raising agricultural costs that will eventually be reflected in higher food prices. This doesn’t even account for the higher cost of delivering food to your favorite merchants. None of this is theoretical. These are real, observable price increases that households and businesses will incur over time.

However, as of April 1, 2026, the T index reports a year-over-year inflation rate of +1.26%. At first glance, this seems almost disconnected from reality, considering the energy shock. But the explanation isn’t that inflationary pressures are absent—it’s that they are offset by other components that carry much larger weights in the index.

Source: Truflation Network

In other words, T’s component weighting relative to the CPI explains some of the divergence. T assigns weights of 23.1% to housing, 19.8% to transportation, 15.2% to food, 8.8% to health, 6.0% to utilities, and 3.2% to gasoline. The combined weight of new and used vehicles equals 9.1%, highlighting a notable imbalance. A 40.3% increase in gasoline prices, affecting its 3.2% weight, would boost headline inflation by roughly 1.3%. However, this is offset by declines in other higher-weighted items in the T-index, such as softer housing prices (+0.8%) and lower vehicle prices (-1.25%).

Instead of using lagged rent prices, as the Consumer Price Index does, T uses real-time housing prices. That means that as rent prices have begun to ease, T captures those price declines faster than the CPI. Additionally, the housing weight is 23% for the T metric versus 34% for the CPI.

Interestingly, the annual change in housing prices for T was +0.8% as of April 1, 2026, compared with +3.0% for the U.S. CPI. In contrast, the yearly change in housing rents, as measured by the National Apartment List Index, fell by -1.7%, while Zillow reported a yearly increase of +1.9%. The discrepancy arises because the National Apartment List Index measures single-family homes and apartments, whereas Zillow mostly measures multifamily apartment rents. T tries to measure all these categories, including payments made by individuals holding mortgage debt. As one can see, all these price indices measure different aspects of the housing rental market, which explains the different outcomes.

These are some of the reasons why T can show a relatively muted 1.26% inflation rate even as energy prices have surged. This suggests that we should view each index differently. To measure whether inflation is rising or decelerating, one should observe each index separately and see how it is changing over time. So, although the T index is rising at a yearly pace of +1.26%, one should ignore the fact that it is rising almost twice that pace in February 2026!

Source: Truflation

Consumer Price Index

The Consumer Price Index (CPI) rose faster at a yearly pace of +3.3% in March 2026, not because it is more accurate, but because it is constructed differently. The rent component in the CPI consists of rent paid on a primary residence (up +2.6 at a yearly pace), with a weight of 7.8%, while the owner equivalent rent component, imputed for homeowners, with a weight of 26.2%, rose at a yearly pace of +3.1%. The weights of new cars (up +0.5%) and used vehicles (down -3.2%) are lower in the CPI than in the T-index (9.1%).

The main reason for the differences between the T and CPI indices is that T is measured almost in real time, whereas the CPI index is generated with a data lag. This is especially true for the CPI housing component, which notoriously records data on rental agreements signed within the past 6 months or longer. This means the latest CPI report continues to reflect elevated rent increases through mid-2025, even as current market rents have begun to ease! In contrast, the T index uses current asking rents and real-time pricing feeds, allowing it to detect housing disinflation much more quickly.

When you combine a larger housing weight with lagged data in an environment where rents are decelerating, it becomes clear why the CPI is reporting a higher inflation rate. Similarly, because vehicle weights are lower in the CPI than in the T index, the deflationary effects of weaker car prices are less able to offset energy-driven increases.

This doesn’t mean one measure is right and the other is wrong. Instead, they answer slightly different questions. T functions more like a “speedometer,” capturing real-time shifts in pricing momentum. CPI is more like a “moving average,” designed to smooth volatility and reflect the broader cost of living over time. The divergence isn’t a conspiracy; it results from the different structures of each price metric.

Those who dismiss the war’s inflationary impact because T reads 1.26% are mistaken. This is as flawed as claiming inflation is out of control based solely on gasoline prices. The war has clearly put upward pressure on energy prices and, by extension, on transportation, food, and industrial prices. The fact that other large components offset this pressure doesn’t mean it isn’t happening. It simply hides it at the headline level.

A useful analogy is the debate over whether tariffs have raised U.S. inflation. Tariffs did push up prices in affected categories, but their effect on overall inflation was often muted because other factors were pulling inflation down. Claiming tariffs had “no impact” is misleading. The same logic applies here. The U.S.–Iran war is inflationary, but its effect is being partially offset by declines in housing and vehicle prices—at least for now.

To assess the war’s true effect, it’s better to compare each index’s change from its pre-war baseline rather than relying on the reported absolute inflation rate. According to this measure, T already shows a notable change, with inflation doubling since the February lows. Once the CPI is updated to include more recent housing market data, we will see the housing component of the CPI approach that of the current T-index. Of course, by the time that happens, the T-index will be measuring other future housing price trends.

There is also an important structural difference in how weights are updated. T recalibrates its weights annually using the most recent year’s household expenditure data and other high-frequency data, so its 2026 weights reflect 2025 consumption patterns. The CPI also updates weights, but with a longer lag—typically two years—making it slower to reflect changes in consumer spending habits. From a purely economic perspective, more up-to-date expenditure weights arguably provide a more accurate picture of current consumption behavior, although the CPI’s stability benefits policy use.

Both measures depend on prices to measure inflation, but the frequency and timeliness of those prices vary. T collects around 15 million data points daily, while the CPI uses monthly surveys on about 80,000 data points. This difference becomes especially important during periods of rapid change.

Girl Scout Cookies

For those who remain skeptical, consider a simpler example. The price of a box of my favorite Girl Scout Cookies has increased from about $3.00 to approximately $6.50 in 2026. That’s more than double the original price. However, this change did not happen in the past 12 months. It happened over the last 26 years that I have been enjoying this delightful treat. To say that these cookies have experienced price increases of over 100% would be a misuse of the term. Inflation measures the rate of change, often over a 12-month period.

The same principle holds true today. Saying inflation is 1.26% (T) or even 3.3% (CPI) doesn’t mean that prices are low. It refers to how quickly prices are rising, over the past 12 months, in addition to the substantial increases already reflected in the overall price level. Consumers, on the other hand, notice the cumulative impact, not just the small changes, which is why the data often feels disconnected from everyday experience. On April 10, 2026, the University of Michigan Consumer Survey reported that U.S. consumers now expect inflation to rise by 4.8% over the next 12 months, up from 3.8% last month!

Source: University of Michigan Consumer Sentiment Survey

Summary and Concluding Thoughts

The most honest and nonpartisan conclusion from our analysis is that both T and the CPI are legitimate methods for measuring inflation. The U.S.–Iran war is driving inflation higher, especially through energy prices. Meanwhile, large, influential components like housing and vehicles are offsetting these price trends, a pattern that is clearer in real-time data than in delayed official statistics.

If someone insists that inflation should only be measured by gasoline prices, ask if they’d accept a 20% monthly drop in gasoline as proof of 20% deflation. Meanwhile, all other prices they pay keep rising. The answer is clearly no. That’s exactly why inflation is measured using a basket of goods with assigned weights.

For a cynical audience, the message is simple. There is no secret agenda in the data—only different methods that offer different perspectives. The most reliable signal comes not from choosing one metric over another, but from watching the trend in both. And right now, no matter which price index you choose, the trend—since the U.S.-Iran conflict began—has been clearly upward.

The short answer is yes, but the full explanation also examines some of the tradeoffs associated with moving in this direction. Two Presidential Executive Orders (EO), issued on March 13, 2026, titled “Promoting Access to Mortgage Credit” and “Removing Regulatory Barriers to Affordable Home Construction,” aim to boost housing demand by increasing credit availability and to boost supply by lowering construction costs for U.S. homebuilders. The goal is to revitalize U.S. Existing Home Sales (which account for 87% of total home sales), hovering at the lowest levels since the Great Recession. In contrast, U.S. new single-family home sales, which account for the remaining share of the pie, have fallen to their lowest levels since 2022. Interestingly, the outcomes of these EOs are complex, and opinions among housing market analysts, advocates, and financial institutions vary.

Source: U.S. Census Bureau

Improving Access to Credit

At the core of the first EO, “Promoting Access to Mortgage Credit,” is the idea that regulatory burdens introduced after the 2008 financial crisis have unintentionally limited mortgage lending, especially among Community Banks and Credit Unions. America’s Credit Unions, President and CEO Scott Simpson, believes that this EO will make credit more readily available for prospective homebuyers.

Given that the average asset size of a Credit Union in a state like Michigan is around $700 million, these institutions face disproportionately high compliance costs relative to their size. The reporting requirements under Dodd-Frank-era regulations, including Ability-to-Repay (ATR) rules, Qualified Mortgage (QM) standards, and the Home Mortgage Disclosure Act (HMDA), have increased the compliance costs of originating mortgages. As a result, many smaller lenders have scaled back the origination of smaller-denominated mortgages needed in lower-income neighborhoods.

This EO seeks to reverse this trend by instructing regulators (such as the Consumer Financial Protection Bureau (CFPB), the Federal Reserve, and the National Credit Union Administration (NCUA)) to “right-size” these regulations. One of the key proposed changes involves raising HMDA reporting thresholds. Currently, lenders must report detailed loan-level data if they originate more than 25 closed-end mortgages annually. America’s Credit Unions has recommended raising this threshold to at least 500 mortgage loans. Increasing that threshold would exempt many smaller institutions from overly burdensome reporting requirements. Compliance with HMDA is resource-heavy, requiring specialized staff, data systems, and legal oversight. By reducing this burden, credit unions will be able to allocate more resources to lending activities rather than administrative tasks.

Supporters argue that this regulatory change could greatly improve access to credit. By reducing per-loan compliance costs, lenders may find it financially viable to originate smaller mortgages, addressing a long-standing gap because these loans typically generate less revenue.

For example, in Detroit, Michigan, Zillow estimates that a typical home sells for only $74,828, even though the widely respected Case-Shiller Index reveals that home prices in this city have increased by 2.9 times since the Great Recession (Dec. 2007-June 2009).

Zillow’s Price Estimate of a Typical Home in Detroit, Michigan

Source: Zillow

Source: S&P Global and St. Louis Federal Reserve (FRED) Database

In such areas, the fixed compliance cost of originating a mortgage can constitute a large portion of the loan’s revenue, creating a disincentive to lend. If credit unions and community banks are able to re-enter these markets, it could significantly expand homeownership opportunities for first-time buyers and low- to moderate-income families.

Of course, we would be remiss if we didn’t mention that, venturing into the broader Detroit Metropolitan market, especially in higher-end neighborhoods like Boston-Edison and Downtown, median home prices are significantly higher, ranging from $315,000 to $340,000.

Another noteworthy aspect of this EO is that it encourages the wider adoption of digital tools—such as electronic signatures, remote online notarization, and automated valuation models—which can reduce closing times and transaction costs. These improvements could result in lower fees for borrowers and enhanced operational scalability for lenders. Additionally, the order promotes increased access to liquidity through Federal Home Loan Bank (FHLB) advances, especially for institutions financing entry-level housing, and further supports greater loan origination.

In contrast, some consumer advocacy groups and some housing analysts warn that reducing regulatory oversight could reintroduce vulnerabilities that emerged during the 2008 financial crisis. The ATR and QM rules were specifically designed to ensure that borrowers could repay their loans and that lenders follow strict underwriting standards. Loosening these requirements might lead to riskier lending practices. Nonetheless, this risk may be lower for credit unions, which usually rely on relationship-based lending and have historically experienced lower default rates.

Another drawback of reducing HMDA reporting requirements is that this data is used to identify patterns of discrimination in mortgage lending. Requiring lenders to disclose detailed borrower demographics, income levels, and loan outcomes helps regulators and researchers assess if certain groups are underserved or treated unfairly. Raising reporting thresholds would decrease this relevant data and make it harder to detect discriminatory practices that could impact minority and low-income borrowers, undoing years of progress in fair housing efforts.

However, from a credit union perspective, the executive order is generally seen as a positive development because the reduction in compliance costs will improve operational efficiency and profitability. Smaller institutions, which often operate with thin margins, also stand to benefit considerably from a “cure-first” supervisory approach (included in this EO) that focuses on correcting technical errors rather than imposing fines. This change decreases regulatory uncertainty and allows credit unions to concentrate more on serving their members. At the same time, the easing of the QM safe harbor provisions for portfolio loans provides additional legal protection, encouraging lenders to extend credit to borrowers who may not meet strict QM underwriting standards but are still creditworthy.

Boosting the Supply of Housing

While increased credit availability can improve access to financing for home purchases, it does not directly address the core issue of housing supply. This is where the second executive order, “Removing Regulatory Barriers to Affordable Home Construction,” comes into play. By focusing on lowering construction costs, this EO aims to support the supply side of the housing market. The National Association of Homebuilders estimates that government regulations at the federal, state, and local levels add $93,870 to the cost of building an average new home in the United States, up from $65,224 in 2011. These costs emanate from zoning restrictions, environmental rules, building codes, and permitting delays. The executive order aims to reduce these costs by streamlining federal regulations, promoting best practices for state and local governments, and encouraging the adoption of more flexible building standards.

Source: National Association of Homebuilders

This EO also seeks to reduce the energy-efficiency and “green” building regulations, which account for a significant portion of the regulatory costs for building a typical new home.

Proponents argue that reducing construction costs will increase homebuilders’ profit margins, which could motivate them to build more homes. In markets with serious housing shortages, even minor increases in supply can help stabilize or lower prices. Supporting modular and manufactured housing, which can be produced more efficiently than traditional on-site homes, is another potentially transformative aspect of this EO. By lowering barriers to these alternative construction methods, the policy could provide more affordable housing options.

However, the effectiveness of this executive order may be somewhat limited because many of the biggest regulatory hurdles to housing construction are handled at the state and local levels. Zoning laws, land-use regulations, and local permitting processes account for a large portion of the $94,000 cost estimate. While the federal government can provide guidance and incentives, it cannot directly impose changes on local policies. Therefore, the true impact of the order will largely depend on how willing state and local governments are to adopt the suggested reforms.

In contrast, some critics have raised concerns about the potential environmental and social impacts of deregulation. Easing environmental standards could have long-term effects on sustainability, especially in regions with fragile ecosystems. Likewise, reducing building code requirements might save money but could also weaken housing quality and durability. Additionally, there is always the risk that any cost savings from deregulation may not be fully passed on to consumers, particularly in markets with limited competition or high demand.

Summary and Concluding Thoughts

Our nonpartisan review of these two EO’s, issued on March 13, 2026, revealed an ambitious effort to increase homebuyers’ access to credit and boost housing supply by easing regulations. They offer distinct advantages by lowering mortgage origination costs and expanding access to credit in smaller financial institutions and underserved markets.

In some low-cost housing cities like Detroit, Michigan, the combined effects of these two EO’s could be beneficial as homebuyers often find affordable housing prices but face significant supply constraints and limited access to credit. By making small-dollar mortgages more profitable for Credit Unions and reducing construction costs, the outcome might be a boost in housing demand and supply.

Supporters of these EO’s view them as a necessary correction to excessive regulation, making mortgages more accessible and lowering housing construction costs, which could help control housing prices. Conversely, critics argue that rolling back important safeguards might increase social risks without offering significant savings for home buyers if homebuilders do not pass those lower construction costs on to buyers.

Nevertheless, we remain hopeful that these EOs will provide a needed boost to the U.S. residential housing market, which continues to face negative economic headwinds.

The behavior of the CBOE Volatility Index (VIX) around major macro shocks provides high-frequency insights into investor psychology, risk pricing, and how uncertainty spreads into equity markets. Two recent events—Liberation Day on April 2, 2025, and the start of the U.S.–Iran conflict on February 28, 2026—offer a useful comparison because they triggered sharp spikes in volatility but were fundamentally different in their origins, duration, and macroeconomic impacts. Although both events caused quick revaluations in U.S. stocks, the size, trajectory, and persistence of implied volatility reveal that investors perceived these shocks very differently: one as a sudden, policy-driven disruption with reversible effects, and the other as a long-term geopolitical and inflationary disturbance.

The timing of both events is crucial for understanding (from a nonpartisan perspective) how investors responded. Liberation Day marks the day when broad reciprocal tariffs were announced, including a 10 percent universal baseline. The U.S.–Iran conflict began during the weekend of February 28, 2026, with market reactions observed when trading resumed on Monday, March 2, 2026.

Source: CBOE and the St. Louis Federal Reserve

From a quantitative perspective, the divergence begins with the peak levels of the VIX and the implied daily volatility within those readings. After Liberation Day, the VIX jumped sharply from below 17 to a peak of 52.3 in just a few sessions. Converting this to implied daily volatility by dividing the VIX by the square root of 252 trading days results in an expected daily move of about ±3.27% for the S&P 500. This is an extreme level, comparable to crisis conditions and periods of intense systemic stress. In comparison, during the early phase of the U.S.–Iran conflict, the VIX hit an intraday high of 35.3 on March 9, 2026, which corresponds to an implied daily move of roughly ±2.21%. Although still above long-term averages, this level is much lower than the 2025 spike, indicating a less severe but still notable repricing of risk.

Source: Author’s Computations Using Data from CBOE and the St. Louis Federal Reserve

The difference isn’t just in size but also in timing. The spike in volatility during Liberation Day was sudden and sharp, marked by a near-vertical rise in implied volatility followed by a quick return to normal levels. In contrast, the volatility during the U.S.–Iran conflict has been more persistent, with the VIX remaining above 20 for an extended period. This ongoing presence suggests that investors view the underlying risk as continuous rather than temporary, requiring a sustained volatility risk premium instead of a brief spike.

Equity market performance supports this interpretation. Following Liberation Day, the S&P 500 saw a sharp decline of about 19% from its highs within a short period. This quick sell-off demonstrates a typical “gap risk” situation, where investors are forced to quickly revalue assets due to an unexpected policy shift. However, the recovery was equally swift, forming a V-shaped pattern as partial reversals in policy rhetoric—such as talks of tariff pauses or negotiations—offered a believable route back to normalcy. The rapid decline and recovery suggest that investors regarded the shock as serious but potentially reversible, depending on policy changes.

The market response to the U.S.–Iran conflict has been significantly different. Instead of a sharp crash, the S&P 500 fell about 7.4% during the first month of the conflict, with losses building gradually over several consecutive down weeks. This “grind lower” pattern signals a market that is continually reevaluating fundamentals rather than reacting to a single abrupt shock. The lack of a quick capitulation phase indicates that investors are not anticipating an immediate systemic collapse but are instead adjusting expectations for earnings, inflation, and monetary policy over a longer period.

These differences can be explained by the nature of the underlying shocks. Liberation Day represents a policy shock—specifically, a sudden and unexpected change in global trade rules. Policy shocks are inherently binary and reversible. They create uncertainty around regulatory frameworks, supply chains, and cross-border flows. However, they also include an implicit option value: the possibility that policymakers will modify or rescind the measures in response to market pressure or political considerations. This optionality usually increases initial volatility, as investors need to consider a wide range of potential outcomes, but it also allows for quick mean reversion once the possible outcomes become more limited or are narrowed.

In contrast, the U.S.–Iran conflict serves as a geopolitical supply-side shock with immediate impacts on energy markets and inflation. The closure of the Strait of Hormuz (which I discussed in a recent article) and the resulting surge in oil prices, exceeding $110 per barrel in this case, are likely to raise input costs worldwide. Unlike tariffs, which can be negotiated or delayed, geopolitical conflicts often lack a clear resolution timeline. This introduces duration risk, as investors must consider the possibility of extended disruptions to energy supplies, persistent inflationary pressures, and secondary effects on monetary policy.

The inflation channel is particularly important in distinguishing the two episodes. During the Liberation Day shock, the main concern was trade disruption and its impact on global growth. While tariffs can be inflationary in a narrow sense, they were primarily viewed as a demand shock with uncertain implications for central bank policy. In contrast, the U.S.–Iran conflict is being priced as a stagflation event, combining slower growth with higher inflation. Rising energy prices directly boost headline inflation and indirectly affect core measures through transportation and production costs. This dynamic complicates the policy response, as central banks might be limited in easing financial conditions even as growth slows.

This distinction helps explain why implied volatility has been “stickier” during the 2026 episode. When inflation risk is high, the range of possible policy responses broadens, and the correlation pattern between asset classes becomes less predictable. Equity investors must face not only earnings uncertainty but also the potential for higher discount rates, which reduce valuation multiples. Consequently, the risk premium embedded in the VIX stays elevated longer, reflecting both macroeconomic uncertainty and policy ambiguity.

Another key difference lies between certainty and duration. The shock of Liberation Day, though sudden, was quite clear in its origin and possible resolution methods. Investors could develop scenarios based on policy negotiation outcomes, leading to expectations quickly aligning once new information emerged. In the U.S.–Iran conflict, however, the uncertainty isn’t about a single policy decision but about the future direction of a larger geopolitical situation involving multiple parties. This creates a wider range of possible outcomes, from escalation to de-escalation, each affecting energy markets, global trade, and financial conditions differently.

Market microstructure also shapes these dynamics. During the Liberation Day episode, the rapid spike in volatility likely triggered systematic selling by volatility-targeting strategies, risk parity funds, and option-hedging flows, worsening the initial move. However, as volatility receded, these same mechanisms supported a quick rebound, reinforcing the V-shaped recovery. In the U.S.–Iran conflict, the slower rise in volatility may have led to a more gradual, sustained deleveraging process, causing a prolonged decline in equities without sharp capitulation.

Sectoral behavior, though not the primary focus here, highlights how investors react differently. During a policy-driven shock like Liberation Day, the effects are broad, impacting multinational firms, exporters, and import-reliant industries at once. Conversely, a supply-side energy shock results in uneven impacts: energy producers gain from rising prices, while energy-intensive sectors face margin squeezes. This variation can slightly dampen overall index volatility but still push the entire market downward.

From a behavioral finance point of view, the contrast can be described in terms of how people process shocks. The Liberation Day event caused a “panic and relief” cycle, where investors first overreacted to a worst-case scenario and then quickly adjusted as new information lowered uncertainty. The U.S.–Iran conflict, on the other hand, has led to a “slow digestion” process, where investors gradually change their expectations as new developments unfold. This results in lower peak volatility but longer-lasting effects, as the market steadily incorporates new information instead of resolving uncertainty all at once.

Summary and Concluding Thoughts

The implied daily volatility figures, ±3.27% for Liberation Day compared to ±2.21% for the U.S.–Iran conflict, clearly illustrate this difference. The higher figure in 2025 suggests a market preparing for significant short-term fluctuations in either direction, aligned with a sudden and potentially reversible shock. The lower but stable figure in 2026 indicates a market expecting moderate, ongoing changes, consistent with a continued, structurally embedded risk.

Our analysis shows that the VIX is not only a “fear gauge,” but also indicates how that fear spreads over time. Liberation Day triggered a brief, high-amplitude volatility spike caused by policy uncertainty and the possibility of a quick reversal. The U.S.–Iran conflict has led to a lower-amplitude, longer-lasting volatility regime driven by geopolitical risks, energy market disruptions, and inflation pressures. These differences highlight the importance of distinguishing between different types of shocks when interpreting volatility metrics and assessing market reactions.

In a policy-shock environment (for example, Liberation Day), opportunities can emerge from quick dislocation and recovery, highlighting tactical positioning and mean-reversion strategies. During a geopolitical and inflationary shock (e.g., the U.S.-Iran conflict), the emphasis shifts to risk management, sector rotation, and the resilience of earnings amid changing macro conditions. The ongoing high volatility in this scenario suggests that investors will likely require a higher risk premium for an extended period, even without further escalation.

The lessons learned from our analysis show that not all volatility spikes are alike. The source, structure, and macroeconomic environment of a shock affect not only the level of implied volatility but also its path and impact on asset prices. These findings indicate that equity markets should be more cautious about wartime events involving multiple entities and less worried about policy changes that can be partially or completely reversed.

The question of whether oil prices can fall sharply—even if the Strait of Hormuz remains closed—depends on a basic macroeconomic fact: prices are set where global supply meets global demand. If supply stays constrained, as would happen with the continued closure of the Strait of Hormuz, then a significant drop in oil prices would require a corresponding weakening in global demand. The main issue, therefore, is not just whether the United States can resolve the U.S.-Iran conflict, but whether global economic conditions can worsen enough to offset the ongoing reduction in supply.

To address this issue from a nonpartisan viewpoint, it may be helpful to revisit the recent episode of extreme demand destruction: the 2020 global pandemic shock. Using figures from the International Monetary Fund, global real GDP contracted by about 3.1% in 2020—the deepest synchronized downturn since the Great Depression. During that same period, global oil demand decreased by 20 million barrels per day at the recession’s low point! On an annual average, the 2020 decline was roughly 9.1 million barrels per day.

Source: International Monetary Fund and World Bank

This historical comparison shows the level of economic decline required to significantly reduce oil prices during a supply shock. Today, the Strait of Hormuz remains the world’s second-largest energy chokepoint. About 20 million barrels of crude oil and petroleum liquids pass through it each day, accounting for roughly one-fifth of global consumption.

Source: Energy Information Administration

However, the good news is that some energy flows are still sailing through the Strait of Hormuz. Additionally, at the end of March 2026, it was reported that another 7 million barrels per day are entering the global market via Saudi Arabia’s East-West pipeline. After accounting for these mitigations, most reliable estimates suggest the net supply disruption is between 8 and 10 million barrels per day. The main takeaway is that, to lower oil prices, global demand would need to drop by a similar amount.

A general rule used by the International Energy Agency (IEA) estimates that a 1-percentage-point drop in global GDP growth usually results in a decrease in oil demand of about 0.5 to 0.7 million barrels per day. Using this rule of thumb, reducing real global economic growth from OECD’s estimate of 2.9% to zero could decrease oil demand by roughly 2 to 3 million barrels per day compared to the trend.

Our hope and expectation are that once the U.S. ends all wartime activities, more oil tankers might be allowed to pass through the Strait of Hormuz even if it remains officially closed, potentially halving the current supply shortfall. However, even with our optimistic outlook, the global economy would still face a severe, synchronized downturn that would affect employment, trade, and financial stability, resulting in 0.0% growth in 2026, if the Strait of Hormuz remained closed for the rest of the year, compared with the latest 2.9% global growth forecast by the OECD.

Although it would indicate a serious global economic downturn, we would avoid the worst-case scenario of negative global economic growth. Still, for reference, the IMF defines a global recession as occurring when global economic growth falls to 2.5% or lower. In contrast, the OECD considers a global recession to occur whenever global economic growth is 2.0% or less.

Another important factor in this analysis is the role of strategic and commercial oil inventories. Governments and international organizations have, over time, accumulated large reserves to protect against supply disruptions. In a coordinated release scenario, these reserves can provide a significant but ultimately temporary cushion against supply disruptions. During the 2022 energy crisis following Russia’s invasion of Ukraine, coordinated releases by IEA member countries totaled approximately 1-2 million barrels per day over several months. At peak capacity, a globally coordinated effort could inject 3 to 5 million barrels per day into the market for a limited time.

Compared to our supply shortfall, even a vigorous strategic petroleum reserve (SPR) release would only partially close the gap. For instance, a 2 to 4-million-barrel-per-day release would still result in a net deficit of a few million barrels per day, which would need to be offset by either demand destruction or price-driven rationing. In such a case, prices would likely stay high as the market balances through lowered consumption and greater incentives for marginal production.

It is also crucial to consider the behavioral and expectation-driven aspects of oil markets. Prices are not determined solely by current supply and demand but also by expectations of future conditions. If market participants believe that the closure of the Strait of Hormuz will last a long time, or that geopolitical risks will remain elevated, then prices might include a risk premium that would persist, even if some supply is restored or demand weakens. Conversely, a credible resolution to the conflict—even with the strait still partly blocked—could lower this risk premium, putting downward pressure on prices at the margin.

This explanation may clarify the argument that oil prices could fall if the United States successfully ends the war in Iran. A de-escalation might reduce uncertainty, lower insurance and shipping costs, and encourage gradual increases in production from other regions. However, these effects are unlikely to outweigh the primary supply-demand imbalance caused by a closed or restricted Strait of Hormuz.

Summary and Concluding Thoughts

When assessing the plausibility of significantly lower oil prices under current conditions, it is crucial to differentiate between cyclical and structural drivers. Cyclical factors—such as a slowing global economy or coordinated reserve releases—can affect prices temporarily. However, they are unlikely to fully counteract a structural supply shock of 8 to 10 million barrels per day. Structural adjustments, such as the transport of oil via a Saudi pipeline, increased production from non-OPEC producers, or a partial reopening of the Strait of Hormuz, may help but will likely be insufficient to restore oil market prices to pre-War levels.

Instead, a sharp drop in oil prices, combined with the ongoing closure of the Strait of Hormuz, would require an extraordinary collapse in global demand. With the latest OECD estimate of global growth at 2.9%, the gap between normal conditions and the contraction needed to offset the current supply shortfall is significant. While strategic reserves and geopolitical de-escalation can help lessen some upward pressure on prices, they are unlikely to be enough to cause a sustained and substantial decline in oil prices without a severe downturn in the global economy.

However, the wildcard in our analysis is that Iran might receive enough concessions or be diplomatically encouraged to reopen the Strait of Hormuz, making all our contingency discussions moot and causing oil supplies to gradually return to pre-War levels. In that highly optimistic scenario, we could see oil prices slowly falling back to their pre-War levels.

The escalating tensions between the United States and Iran have triggered a classic geopolitical shock in a fragile global economy, with effects extending beyond the Gulf region. The economic impact has permeated energy markets, financial conditions, trade flows, and consumer and business confidence. While conflicts are often viewed through military or diplomatic lenses, their economic consequences can be just as significant, especially when they involve the Middle East, a crucial region for global energy supplies. This situation is further highlighted by the growing divide among major international economic institutions—particularly the cautious approach of the OECD versus the more bullish forecasts of the IMF and World Bank—illustrating how the conflict’s economic fallout is unfolding. Below is a nonpartisan review of the impact of the recent U.S.-Iran conflict.

The most immediate and visible way a U.S.-Iran conflict impacts the global economy is through energy prices. Iran’s proximity to the Strait of Hormuz (which I covered in a previous Substack article) is a crucial choke point through which about one-fifth of the world’s energy supply passes. This means that any disruption, whether real or perceived, has generated a risk premium in global energy prices. Even without direct supply disruptions, increased uncertainty alone can lead to speculative rises in energy prices. These increases, in turn, affect the global economy by increasing costs for transportation, manufacturing, and household expenses. For the U.S., even though it is a major energy producer, its economy remains closely tied to global oil markets. As a result, higher global prices will lead to higher domestic gasoline prices, heating costs, and broader inflation pressures.

This inflationary shock is especially important in the current macroeconomic environment, where central banks are working to bring inflation back to target levels after the post-pandemic spike. A persistent rise in energy prices constitutes a cost-push shock, complicating policy decisions for the Federal Reserve and other central banks. Higher energy costs directly increase headline inflation and feed into core inflation through increased transportation and production expenses. As businesses pass these costs on to consumers, this leads to a widespread rise in prices for goods and services. Simultaneously, higher energy prices diminish real household income, cutting into discretionary spending and weakening overall demand. This combination—rising inflation alongside slowing growth—heightens the risk of stagflation, a situation that policymakers have historically found challenging to control.

The idea of demand destruction is crucial to understanding this process. As households spend more of their income on basic energy costs, they have less to spend on non-essential goods and services. This change in spending decreases economic activity in many sectors, from retail and travel to manufacturing durable goods. In the United States, where consumer spending accounts for about two-thirds of GDP, even a slight shift in buying habits can greatly affect overall economic growth. The outcome is a negative feedback loop where rising energy prices drive inflation higher and slow down economic growth—a double challenge that’s especially difficult for an economy already coping with high interest rates and tighter financial conditions. These negative economic headwinds have not gone unnoticed in U.S. equity markets, where the S&P 500 Index, which measures U.S. equity market activity, was down 6.0% year-to-date at the time of this writing.

Source: Yahoo Finance

Globally, the impact is even more significant, especially for energy-importing economies in Europe and parts of Asia. The OECD’s recent decision to keep a relatively cautious growth outlook reflects the realization that the Middle East conflict has effectively “knocked the global economy off a stronger growth path.” This contrasts with earlier forecasts from the IMF and the World Bank, made before the escalation of tensions and therefore not fully accounting for the conflict’s economic effects. As a result, the IMF’s global growth forecast of about 3.3 percent for 2026 and the World Bank’s estimate of around 2.6 percent are also likely to be revised lower once their updated projections are issued later in the year.

The OECD’s recent cautious forecast, released this week, which considers the effects of the U.S.-Iran conflict, predicts that global economic growth will slow to 2.9% in 2026, down from 3.3% in 2025. Unlike the IMF, which often emphasizes resilience and structural growth drivers such as technological innovation, the OECD places greater weight on cyclical headwinds, policy uncertainty, and structural constraints, including aging populations and labor market rigidities. This methodological difference has important implications for how each institution interprets the economic impact of geopolitical shocks. In the current context, the OECD’s emphasis on persistent inflation risks and tighter monetary policy aligns more closely with the likely consequences of sustained higher energy prices.

Historical evidence suggests that all major international organizations exhibit some degree of optimism bias, particularly during periods of economic stress. However, the degree of optimism varies systematically. The IMF is generally the most optimistic, often projecting stronger growth based on assumptions about policy support and structural resilience. The World Bank tends to occupy a middle ground, incorporating a more cautious assessment of risks, particularly for developing economies. The OECD, by contrast, is typically the least optimistic, frequently projecting slower growth and highlighting downside risks. In terms of forecast accuracy, research indicates that the World Bank’s projections are the most reliable, followed by the IMF, with the OECD trailing slightly, particularly in anticipating business-cycle turning points.

For the United States specifically, the economic implications are multifaceted. On one hand, higher energy prices can benefit domestic oil producers, supporting investment and employment in the energy sector. On the other hand, these benefits are typically outweighed by the broader negative effects on consumers and energy-intensive industries. Higher gasoline prices act as a tax on households, reducing disposable income and dampening consumption. At the same time, increased input costs for businesses can lead to margin compression, reduced investment, and, in some cases, layoffs. The net effect is a slowdown in economic growth, even as inflation remains elevated. Ironically, for China, despite some short-term pain from higher energy prices associated with the U.S.-Iran conflict and demand destruction effects on its exports, the country may benefit as it pivots towards greater electrification and the use of green energy, which would make the country less vulnerable to higher oil prices.

Credit Markets

Credit markets also play a critical role in transmitting the effects of geopolitical shocks. Heightened uncertainty tends to increase market volatility, widen credit spreads, and tighten financial conditions, reflecting higher inflation expectations and flight-to-safety demand. For policymakers, these developments complicate the task of calibrating monetary policy, as they must balance the need to contain inflation with the risk of exacerbating an economic slowdown. Still, at this time, the effects of higher inflation appear to be dominating U.S. credit markets as evidenced by the recent uptick in U.S. bond yields.

Source: CNBC

Consumer Are Raising Their Expectations of Inflation

Concerns about rising inflation expectations were reflected in the latest University of Michigan’s one-year-ahead inflation expectations (released on March 27, 2026), which increased to 3.8% from its mid-month reading of 3.4%. Consumers are paying attention to higher gasoline prices and expect inflation to rise further in the coming year.

Source: University of Michigan Survey (March 27, 2026)

Summary and Concluding Thoughts

The economic impact of the conflict extends beyond energy-importing countries. Even oil-exporting nations may encounter difficulties, especially if rising prices cause a drop in global demand and trade volumes. Additionally, geopolitical instability can interrupt investment flows, supply chains, and regional economic integration. For emerging markets—which are often more susceptible to external shocks—the combination of higher energy costs, tighter financial conditions, and weakened global demand can be especially harmful, raising the likelihood of balance-of-payments crises and debt problems.

The broader implication is that the conflict between the U.S. and Iran functions as a negative supply shock to the global economy, like previous energy crises. These shocks typically lead to higher inflation and reduced growth, a pattern already evident in the OECD’s forecasts. As the IMF and World Bank update their predictions to account for these effects, their outlooks are likely to align more closely with the cautious estimates currently issued by the OECD.

This means the economic effects of the U.S.-Iran conflict are likely to be immediate and extensive, impacting inflation, growth, and financial stability in the United States and within the global economy.

As energy prices rise across the economy, driving up costs and diminishing purchasing power, the probable result is a period of elevated inflation paired with sluggish growth—posing challenges for policymakers and financial markets. The evidence so far suggests that the global economy is entering a more vulnerable phase, in which geopolitical events could significantly affect economic performance and inflation risks.

On March 12, 2026, the Federal Reserve’s regulatory leadership, under Vice Chair for Supervision Michele “Miki” Bowman, introduced a sweeping overhaul of bank capital requirements. The proposal marked a decisive pivot away from the stricter post–Global Financial Crisis regulatory trajectory, reducing common equity tier 1 (CET1) capital requirements across the banking spectrum—from globally systemically important banks (G-SIBs) to regional and smaller institutions.

What Are the Benefits to Banks from the Regulatory Overhaul?

One conservative estimate is that banks will receive $87.7 billion in CET1 relief. Broken down by categories, GSIBs that include large banks with assets over $700 billion (Category I and II) will experience -4.8% CET1 relief, and large regional banks with assets between $100-$700 billion (Category III and IV) will see -5.2% CET1 relief, followed by -7.8% CET1 relief for smaller banks with assets below $100 billion. Another estimate finds that the largest GSIBs have been holding $175 billion in excess capital for years due to regulatory uncertainty surrounding the old rules, which could now be deployed toward increased lending, dividends, and stock buybacks.

At its core, the regulatory changes reflect an understanding of the fundamental trade-off: capital buffers enhance resilience but limit profitability and credit creation. By reducing those buffers, regulators are implicitly prioritizing capital efficiency and lending capacity over the risk of losses the banking system might face during turbulent periods.

Whether that shift increases systemic risk is ultimately an empirical question, and one that will only be definitively answered during the next period of economic stress. However, financial markets can provide a real-time lens into how investors are pricing that risk today.

To assess this risk, we compare the equity volatility and valuation multiples of large banks (KBW Bank Index, BKX) and regional banks (KBW Regional Bank Index, KRX) with those of the broader market (S&P 500 ETF, SPY). The market tools we employed include equity volatility (the standard deviation of daily returns) as a measure of uncertainty and risk pricing for the different bank categories.

Source: Author’s Computations using data from Yahoo Finance

Volatility as a First Derivative of Risk Perception

The standard deviation of daily returns remains the gold standard metric for realized volatility. It captures the dispersion of price movements and serves as a proxy for uncertainty. If investors perceive regulatory easing as increasing risk, one expects bank equity volatility—particularly relative to the broader market—to rise following the announcement. Instead, the data suggest the opposite.

In 2025, both large- and regional-bank equities were more volatile than the broader market. Although some of these results might stem from tightening financial conditions and ongoing concerns about commercial real estate exposure, many could also be linked to the regulatory environment at the time.

As we entered 2026 (before the March 12, 2026, regulatory overhaul announcement), volatility compressed across all indices, reflecting broader stabilization in financial conditions. More interesting, however, after the March 12, 2026 announcement, bank volatility not only declined in absolute terms but fell below that of the broader market (SPY). BKX volatility dropped to 0.74%, while KRX declined to 0.86%, both below SPY’s 0.98%. It is also important to note that as we entered 2026, there were strong rumors in the market that a favorable banking regulation was coming!

From an event-study perspective, this is a critical signal. If the regulatory overhaul had been perceived as increasing systemic risk, one would expect a relative increase in bank-specific volatility. Instead, markets exhibited volatility compression, particularly among large banks.

Although some critics of the March 2026 banking regulatory overhaul believe the reforms were credit-negative, equity investors have interpreted the policy shift not as a destabilizing reduction in safeguards but as a removal of excess constraints. The architect of such change, Michele “Miki “ Bowman, Vice Chair for Supervision at the Federal Reserve, views the changes as a positive development and has been quoted as saying: “The result will be more efficient regulation and banks that are better positioned to support economic growth, while preserving safety and soundness and financial stability.”

However, others may view the lower volatility with more caution and argue that volatility reflects actual fluctuations rather than tail risk. In other words, a system can appear stable under normal conditions but become more fragile in extreme scenarios. This distinction is central to understanding financial crises, where periods of low volatility often precede sharp dislocations.

This suggests that the observed decline in volatility may be due to increased earnings visibility from higher capital efficiency. The diminished regulatory uncertainty resulting from the regulatory overhaul could have fostered short-term investor optimism about greater bank profitability, higher dividends, and share buybacks.

Given our nonpartisan stance, we leave it to the reader to determine whether the favorable market pricing truly reflects an improvement or is simply an extrapolation of near-term benefits, considering that higher loss severity will occur in environments with thinner capital buffers.

Using Forward P/E Ratios As an Alternative Metric

Our next approach was to see whether forward P/E ratios might shed additional light on our analysis by examining whether a re-rating took place after the regulatory reforms were announced on March 12, 2026. A re-rating occurs when investors assign a higher multiple to a sector’s expected earnings, indicating improved confidence in its structural profitability.

The pattern is unambiguous. Large banks saw a significant rise in forward P/E ratios, climbing from around 13x in 2025 to over 15x after the announcement. Regional banks also experienced a more modest increase due to ongoing concerns about asset quality—especially in their commercial real estate portfolios. Meanwhile, the broader market’s multiple remained broadly stable or slightly compressed. The relative implication is clear: banks have been re-rated upward relative to the market.

This narrowing of the valuation discount is particularly important. Historically, bank stocks have traded at a substantial discount to the S&P 500 due to their leverage, cyclical nature, and regulatory constraints. A sustained narrowing of that discount indicates investors perceive a structural improvement in the sector’s rate-of-return profile.

The combination of lower volatility and higher valuation multiples presents a coherent equity market narrative: regulatory easing is a net positive.

Other Views

To be sure, our favorable equity market assessment is not supported by all market participants. Some market analysts at Moody’s have characterized the overhaul as “credit negative,” highlighting the risk that thinner capital buffers could amplify losses in a downturn.

This divergence of views reflects a fundamental asymmetry: equity investors gain from higher return on equity (ROE) driven by lower capital requirements, while credit investors face greater downside risk because capital acts as their primary protection barrier.

Historically, these divergences have been informative. Periods in which equity markets rally while credit spreads widen often signal an underpricing of risk in equity valuations.

Is Our Methodology Sound?

Using March 12, 2026, as an event date for comparing volatility and valuation metrics is methodologically appropriate. The announcement provided the first detailed articulation of capital reductions, making it a natural breakpoint for an event study. However, several caveats must be acknowledged.

First, macro conditions differ across periods. Tighter financial conditions shaped the 2025 environment, while early 2026 has seen shifts in inflation expectations, geopolitical risks, and commodity prices.

Second, short sample windows can be noisy. The March 12–24 period captures only a limited number of trading days, which may not fully reflect longer-term market reassessments.

Third, volatility is an incomplete measure of systemic risk. It captures second-moment dynamics but not tail risk or correlation structures during stress events.

Despite these limitations, the consistency across both volatility and valuation metrics strengthens the inference that equity markets have interpreted the regulatory overhaul as a positive development.

Summary and Concluding Thoughts

The March 2026 regulatory overhaul represents a significant shift in the balance between safety and efficiency in the U.S. banking system. In the immediate aftermath, equity markets have delivered a clear verdict: lower capital requirements are being interpreted as a structural positive.

This is evident in both declining relative volatility and expanding valuation multiples, particularly among large banks. Yet this market signal should not be mistaken for definitive evidence that systemic risk has declined. Rather, it reflects a reweighting of probabilities—one that emphasizes near-term profitability over long-term resilience.

The true test of the new regulatory framework will not come in periods of stability but in times of stress. When the next downturn arrives, the question will not be whether banks are more profitable, but whether they are sufficiently capitalized to absorb losses without transmitting instability to the broader financial system.

Until then, equity markets will continue to rate the regulatory overhaul as a positive development. But whether equity markets are underpricing risk remains an open question to be answered when the next economic downturn arrives at our doorstep!

The discussion about the future of U.S. monetary policy has intensified with the nomination of Kevin Warsh as the next Federal Reserve Chair. Central to this debate is a timeless question: what can we learn from former Fed Chair Marriner Eccles, an influential and complex figure in modern central banking? Eccles’ Federal career (1934-1951) offers valuable insights into the risks and trade-offs of a more active, growth-driven Federal Reserve, particularly one that may better reflect the White House’s priorities.

To start, let’s situate our nonpartisan discussion within the current macroeconomic environment. The U.S. economy slowed in 2025, with real GDP growth decreasing to approximately 2.1% from 2.8% in 2024. Although the slowdown is significant, it still indicates an economy in expansion rather than contraction. In this context, Warsh has argued that the Federal Reserve should lower interest rates further to support economic growth, in anticipation of an artificial intelligence-driven productivity boom. This argument echoes a familiar historical analogy: the late-1990s period under Alan Greenspan, when the Fed allowed the economy to “run hot” amid rising productivity linked to the information technology revolution.

Source: U.S. Bureau of Economic Analysis

However, misconceptions about the Greenspan comparison can lead to the wrong policy analysis. Greenspan did not cut interest rates to encourage growth through expected productivity improvements. Instead, he chose not to raise rates as Fed models might have recommended. The federal funds rate mostly stayed between 5.25% and 5.50%, much higher than today’s 3.5% to 3.75%. During that period, productivity growth was steady and widespread, nearly doubling from about 1.5% annually in the previous two decades to an average of nearly 3% from 1995 to the early 2000s. However, Greenspan eventually raised rates by 75 basis points in 1999, when signs of overheating from the dot-com bubble appeared. The main point is that Greenspan’s strategy was cautious and patient, not aimed at active economic stimulation.

Source: U.S. Bureau of Labor Statistics

This distinction becomes especially important when evaluating Warsh’s current stance. Supporting lower rates now, when policy rates are already well below late-1990s levels, and inflation remains above the Fed’s mandate, signifies a fundamentally different approach, since inflation was below 2.0% when Greenspan chose not to raise interest rates. This contrast also brings the discussion back to Eccles.

Eccles’s tenure in the 1930s and 1940s was characterized by a strong belief that the Federal Reserve should actively support economic growth, especially during periods of weak private-sector demand. He played a crucial role in reforming the Fed through the Banking Act of 1935, which centralized Federal Reserve power in Washington and laid the groundwork for modern countercyclical policies. In many ways, Eccles can be seen as the intellectual originator of activist central banking, advocating what he called “compensatory policy”—the idea that government and central bank intervention should offset private-sector shortages.

This philosophy initially aligned closely with the priorities of the Roosevelt administration, and Eccles explicitly supported the idea that the Fed should work with the executive branch to achieve broader economic goals. In fact, early proposals associated with Eccles would have made the Fed even more directly subordinate to the President. While Congress ultimately rejected such arrangements, the underlying tendency toward policy coordination remained a key aspect of his early tenure.

Unfortunately, the dangers of that approach became clear in two key episodes. The first was the so-called “Roosevelt Recession” of 1937–1938, sparked in part by the Federal Reserve’s decision—under Eccles’ leadership—to double reserve requirements. This move, meant to prevent inflation, instead caused a sharp pullback in credit as banks tried to rebuild reserves. Industrial output plummeted, and the economy slipped into another serious recession. The episode highlighted a basic challenge of activist monetary policy: timing mistakes can have large and destabilizing effects.

The second—and more directly relevant—episode took place during and after World War II. To support wartime financing, Eccles agreed to peg long-term interest rates at about 2.5%, allowing the Treasury to borrow at a low cost. While this policy was likely justified during the war, it became a problem after the war ended in 1945. Despite increasing inflationary pressures, the Fed kept the rate peg, which effectively forced it to keep buying government bonds to maintain low interest rates. In doing so, it expanded the money supply and fueled a surge in post-war inflation.

Here, the parallel to today becomes especially instructive. Eccles’ policy was based on an implied assumption that economic growth and normalization would absorb the monetary expansion without causing lasting inflation. When that assumption turned out to be wrong, the Fed found itself behind the curve. The eventual attempt to reverse course was not only economically difficult but also politically costly. Harry S. Truman declined to reappoint Eccles as Chair in 1948, highlighting the tensions that emerge when monetary policy clashes with political priorities.

Eccles’s most lasting impact came after President Truman chose not to renominate him as Fed Chair in 1948. Instead, he stayed on the Federal Reserve Board as a governor, where he became a key supporter of central bank independence. His efforts were vital to the 1951 Treasury-Federal Reserve Accord, which officially ended the Fed’s obligation to support Treasury borrowing costs and established that monetary policy should be based on economic conditions rather than political motives. A notable parallel today is Fed nominee Kevin Warsh’s strong opposition to the notion that the Fed should remain “data dependent” when conducting monetary policy.

Eccles’s intellectual evolution—from supporting coordination to advocating independence—embodies a key lesson in Eccles’s career. A Federal Reserve closely aligned with the executive branch risks prioritizing short-term growth over long-term price stability. When inflation takes hold, the costs of regaining credibility can be high, both economically and institutionally.

The issue of institutional credibility is closely linked to another unique aspect of Eccles’s legacy: his role as the only Federal Reserve Chair to officially dissent from Federal Open Market Committee decisions. Eccles dissented three times between 1938 and 1939, demonstrating his willingness to challenge consensus in favor of more assertive policy action. Since then, no Fed Chair had cast a formal dissenting vote before Eccles’s tenure. If Kevin Warsh were to become the next Fed Chair while current Fed Chair Powell remained as Governor, it is conceivable that, in pursuit of his agenda, like Eccles, he may have to repeatedly dissent at FOMC meetings to support lower interest rates!

Although U.S. Secretary Scott Bessent was quoted as saying, “only one former Fed Chair has stayed on as a governor, and the president of the United States asked him to stay,” it has actually happened quite frequently. Below are the Fed Chairs who remained Fed Chair (pro tempore) after their terms ended until the U.S. Senate confirmed the next Chair.

· Mariner Ecles: 1948 (served for 72 days)

· Arthur Burns: 1978 (served for 35 days)

· Alan Greenspan: 2002 (served for 110 days)

· Jerome Powell: 2022 (served for 107 days)

Why Consensus at FOMC Policy Meetings Is Important?

Today, modern Fed Chairs now see consensus as a key policy tool. Monetary policy influences not just interest rates but also expectations—what markets believe the Fed will do in the future. If a Chair dissents from their own committee, many market observers say it signals leadership issues and damages the central bank’s credibility. Therefore, Chairs focus on building internal consensus, even when disagreements occur. This approach generally improves the effectiveness of monetary policy transmission, but it also gives the Chair significant agenda-setting power.

Similarly, the dissent among Fed governors in 2025—especially from Michelle Bowman and Christopher Waller, marking the first such occurrence in 20 years—indicates that this consensus model may be under pressure. These disagreements can create uncertainty in financial markets, particularly if they reflect conflicting policy approaches. If Warsh becomes Chair while Jerome Powell remains on the Board as a governor, the risk of visible internal conflict would undoubtedly rise. This scenario would echo the dynamics of the Eccles-Truman era, when debates over the proper stance of monetary policy became both public and impactful.

Source: St. Louis Federal Reserve

For these reasons, the comparison between Eccles and Warsh is relevant. Both figures demonstrate a willingness to challenge mainstream ideas and see the Federal Reserve as a tool for broader economic strategies. However, the risks associated with this approach are real. Relying on expected productivity gains—especially when these gains are uneven today and not yet fully documented—significantly raises the likelihood of policy errors. If the anticipated productivity increase does not occur or happens more slowly than expected, an overly accommodative policy could lead to overheating and rising inflation.

The Greenspan experience reinforces this point. Even in a period of genuine productivity acceleration, the decision to delay tightening contributed to the buildup of financial imbalances that ultimately culminated in the dot-com bubble. Greenspan’s eventual pivot to higher rates underscores that even well-founded optimism must be tempered with vigilance.

For Warsh, the challenge would be even greater. He would start with lower interest rates and higher baseline inflation than Greenspan faced, leaving less room for error. Additionally, the current political climate appears more divided, increasing the likelihood of greater alignment between the Fed and the White House. If Kevin Warsh’s productivity assumption is correct, then the U.S. economy will benefit, but if he’s wrong, the risk of inflation will be knocking loudly at our door.

Summary and Concluding Thoughts

The main lesson from Marriner Eccles’ Fed tenure is that activist monetary policy isn’t necessarily flawed. Instead, its success relies heavily on institutional independence, disciplined implementation, and the ability to change course when needed. Eccles himself eventually recognized this and acted, but it cost him his position as Fed Chair.

If Warsh were to assume the Fed Chair’s role with a mandate to promote growth by aggressively lowering rates, markets should be aware of the risks involved in pushing for faster economic growth while inflation remains above the Fed’s 2.0% target. Because of our nonpartisan stance, we are not taking a side in this debate and are simply alerting the reader to the risks associated with this strategy. Eccles’ legacy acts as both a guide for innovation and a warning about its limits.

The key insight from our analysis is not whether Kevin Warsh’s prediction of strong future productivity growth is correct, but whether the Federal Reserve’s institutional framework can still adapt effectively if his theoretical assumptions prove to be incorrect.

The recent rise in U.S. mortgage rates has surprised many because it appears disconnected from usual inflation expectations. Traditional macro-financial logic indicates that long-term interest rates—and, by extension, mortgage rates—should largely track expected inflation. However, as of March 2026, respected measures of inflation expectations, including those from the University of Michigan Survey of Consumers and the Cleveland Federal Reserve, have fallen while the 10-year U.S. Treasury yield has increased sharply to around 4.39%.

Source: CNBC

Source: Univ. of Michigan Consumer Sentiment Survey

Source: Cleveland Federal Reserve and St. Louis Federal Reserve

Research by the Kansas City Federal Reserve in 2026 shows that consumer inflation expectations are often influenced by gasoline prices and predictions of where those prices might go. However, the term premium is what credit markets require to protect against the risk that the actual “inflation expectations” will turn out to be higher or lower. When the term premium increases, it acts as an insurance fee paid by long-term borrowers (such as the holder of a U.S. 30-year mortgage) when credit markets expect long-term inflation to be higher than base inflation expectations. Many argue that the term premium has risen because the U.S.-Iran war has made inflation more unpredictable, leading financial institutions to demand a higher “insurance premium” on long-term loans (e.g., U.S. 30-year mortgages)!

Recent estimates show that the 10-year term premium has been rising. This rise is important because it indicates a change in how markets price risk, not just a change in baseline expectations. In other words, investors aren’t necessarily expecting inflation to be much higher than before; instead, they have less confidence in predicting the future course of inflation and interest rates.

Source: Kim and Wright Model, and Board of Governors of the Federal Reserve

The effects on the housing market are clear and substantial. As the 10-year Treasury yield climbs due to a widening term premium, mortgage rates also rise, reducing home affordability for potential buyers. This can occur even without a rise in inflation expectations, highlighting the importance of considering factors beyond conventional indicators to explain movements in the 30-year U.S. mortgage rate.

Effects of the U.S.-Iran War

Since few would dispute that a prolonged war can be inflationary, having a baseline forecast of the war’s timeline is crucial in assessing the credit market’s view of the bond market’s term premium. Logic suggests that if credit markets trust President Trump when he said at the start of the war that it would last 4 to 6 weeks and that progress is faster than expected, then we are likely 40 to 60% through the conflict. In fact, on Friday, March 20, 2026, President Trump stated that the war is winding down and may even end before the Strait of Hormuz is reopened.

However, some clients attending my recent in-person presentation have repeatedly disagreed with my optimistic outlook and asked, if this timetable was accurate, why would the administration be requesting an additional $200 billion for war funding and suggesting that this amount could rise? With daily war costs of $2 billion, one client noted, this implies the war could be extended for another 100 days or more.

Setting the 30-Year U.S. Mortgage Rate

The Federal Reserve does not directly set the U.S. 30-year fixed mortgage rate, nor is it solely determined by current inflation. Instead, it is closely linked to the yield on the 10-year U.S. Treasury note, which acts as the benchmark for long-term borrowing costs in the economy. Mortgage lenders usually add a spread above the 10-year yield to cover credit risk, prepayment risk, and servicing costs. Therefore, when the 10-year Treasury yield increases, mortgage rates tend to follow almost automatically.

The key question, therefore, is why the 10-year Treasury yield is increasing in an environment where inflation expectations seem stable. The answer involves breaking down the yield into its two main parts: expected future short-term interest rates and the term premium. In simple terms, the yield on a 10-year Treasury can be viewed as the average expected path of short-term interest rates over the next decade, plus a term premium that investors require for holding a long-term asset. This extra compensation—the term premium—is where the current situation becomes especially significant.

As of March 2026, survey-based measures of inflation expectations show little sign of a breakout in inflation psychology. The University of Michigan survey reports one-year inflation expectations at 3.4% and five-year expectations at 3.2%, both higher than the Federal Reserve’s 2% target but remaining fairly stable in recent months. Meanwhile, the 10-year TIPs breakeven rate, which measures inflation expectations over the next 10 years, is now hovering at a relatively low level of 2.37%. These figures indicate that although inflation may stay somewhat above target in the short term, long-term inflation expectations remain firmly anchored.

Source: Federal Reserve Bank of St. Louis

Another important factor is the evolving view of the Federal Reserve’s policy outlook. Presently, some analysts describe the economic environment as a “no landing” scenario, where economic growth remains robust despite higher interest rates, and inflation persists rather than being temporary. In this scenario, markets might begin to price in the likelihood that the Federal Reserve will maintain high policy rates for a longer period than previously expected or even resume rate hikes if inflation accelerates again. While this somewhat influences the expected trajectory of short-term rates, it also heightens uncertainty about that path, which in turn increases the term premium.

At this point, the probability that the Federal Reserve will leave rates unchanged through December 2026 has risen to 62% due to the rising risk of inflation. Even Federal Reserve Governor Chris Waller, who was appointed by President Trump, said he recently changed his mind after favoring a cut in the federal funds rate following last month’s 92,000 decline in nonfarm payroll, and opted to vote to keep rates unchanged at the last FOMC meeting due to concerns about inflation!

Source: Chicago’s CME Group

Summary and Concluding Thoughts

The gap between survey-based and market-based measures of inflation expectations highlights the complexity of the current environment. Consumer surveys, such as those conducted by the University of Michigan, tend to be affected by price changes in energy products. The recent increase in energy prices due to the ongoing U.S.-Iran war has kept consumer expectations high but relatively stable. On the other hand, market-based measures, including breakeven inflation rates derived from TIPS, are more closely aligned with the Federal Reserve’s long-term goal, reflecting confidence in the central bank’s ability to manage inflation over time.

However, neither of these measures fully captures the risk environment investors face when committing capital for a decade or more. The term premium effectively addresses this gap by including compensation for risks that are hard to quantify. It acts as a gauge of market confidence—not only about future inflation levels, but also in the stability and predictability of overall inflation.

Therefore, the recent increase in U.S. mortgage rates is best understood not just as a simple reflection of rising inflation expectations, but as a result of a higher term premium embedded in long-term Treasury yields. Although survey-based and model-based measures of inflation expectations remain relatively stable, the bond market signals increasing uncertainty and risk. This shift in risk pricing—driven by geopolitical tensions, fiscal pressures, and a more complex macroeconomic outlook—has caused the 10-year Treasury yield to rise, which has in turn pushed mortgage rates higher.

The good news is that if the U.S.-Iran war ends sooner than markets anticipate, the term premium might decline, potentially leading to lower U.S. mortgage rates.

The question of what price West Texas Intermediate (WTI) crude oil must reach to trigger a U.S. recession may initially seem to have a simple numerical answer. Many economic analysts have pointed to thresholds of $100, $120, $130, or even $150 per barrel as key levels where economic harm might become unavoidable. However, focusing only on a fixed price level risks oversimplifying a much more complex process. Oil doesn’t act as a straightforward trigger for recession; instead, it serves as a probabilistic shock whose impact depends not just on price but also on expectations, the length of the shock, and the overall macroeconomic climate.

Source: CNBC

Currently, with spot prices increasing due to geopolitical tensions but future expectations easing, the gap between current conditions and forecasted future prices offers an important perspective for assessing recession risk. Consensus across Wall Street research offers a useful starting point. Bank of America has suggested that sustained oil prices above $100 can begin to dampen equity markets and curb discretionary spending. At $120 per barrel, some analysts see oil as having reached a “recession trigger,” where GDP growth could come to a halt. By the time prices near $130, firms like Wells Fargo Securities argue that the cumulative effects—eroding consumer confidence, reduced spending, and tightening labor markets—become strong enough to cause outright contraction. More extreme estimates from

Vanguard and Oxford Economics place the definitive recessionary threshold closer to $140–$150 per barrel, particularly if those levels persist for several months and coincide with restrictive monetary policy. These thresholds, however, should not be seen as exact tipping points. Academic research by Irfan A. Qureshi and Ghufran Ahmad reveals that the economic impact of oil shocks depends heavily on both the size and the duration of price increases. A quick jump from $80 to $110 in just a few weeks might be more disruptive than a slow rise to $120 over a year. This is because sudden shocks leave households and businesses little time to adapt, leading to immediate cuts in consumption and investment. The transmission channels are well understood: higher gasoline and energy costs reduce real disposable income, raise production costs for companies, and add to broader inflationary pressures, which can cause central banks to keep or tighten monetary policy. Goldman Sachs estimates that every sustained $10 increase in oil prices cuts U.S. GDP growth by about 0.1 percentage point, a modest figure that becomes more significant when increases are large and persistent.

Research by the St. Louis Federal Reserve also finds that almost every U.S. recession since World War II—except the pandemic-related downturn in 2020—was preceded by a sharp rise in oil prices. The oil shocks of the 1970s, the spike before the early 1990s recession, and the rise to over $140 per barrel in 2008 all show how energy costs can act as both a trigger and an intensifier of broader economic weaknesses. However, history also indicates that oil prices alone rarely cause a recession. Instead, they interact with existing imbalances, such as issues in housing markets, credit conditions, or monetary policy, to drive the economy into contraction.

This interaction is especially relevant in the current environment. The recent surge in oil prices, driven partly by geopolitical tensions involving Iran and disruptions in the Strait of Hormuz, has renewed concerns among economists. Moody’s Analytics Chief Economist Mark Zandi warned that a recession becomes “hard to avoid” if elevated prices last for even a few weeks, noting that leading indicators already suggest a 50 percent or higher chance. Goldman Sachs also pointed out that the economic impact of oil shocks is worse when they happen alongside geopolitical uncertainty, effectively doubling the negative effect on GDP. EY-Parthenon describes the current situation as a classic supply shock, characterized by rising inflation and limited output—a combination that increases the risk of stagflation. And yet, despite these warnings, market-based measures of recession risk have shown signs of easing.

Odds that the U.S. Will Enter a Recession in 2026

Source: Polymarket

One of the more interesting developments has been the decline in betting odds on platforms like Polymarket that WTI oil will hit $90 by June 2026, with probabilities dropping from a high of 59 percent on March 10 to around 37 percent more recently. Meanwhile, the forward curve in oil futures markets has not fully confirmed the elevated levels seen in spot prices. This gap between current prices and future expectations is not just a technical detail; it is key to understanding why recession odds may be stabilizing even as headline oil prices stay high.

Source: Polymarket

When the futures curve indicates that prices will fall over time, it suggests that market participants view the current shock as temporary rather than structural. This expectation can lessen the economic impact in several ways. Businesses may be less inclined to cut investment or hiring if they expect lower input costs soon. Consumers, although still affected by higher gasoline prices, may adjust their spending less aggressively if they believe the increase will be short-lived. Financial markets, too, tend to respond more to expected future conditions than to current spot levels, which helps explain why equity markets and recession probabilities may not move in sync with oil prices.

In this context, the key question is not just “What price of oil causes a recession?” but rather “What path of oil prices—over what period and with what expectations—creates enough economic slowdown to trigger a recession?” A temporary spike to $110, or even $120, may not be sufficient if markets anticipate prices will fall soon. On the other hand, a prolonged period of prices in the $90–$100 range might be more damaging if it is accompanied by expectations of further increases or by consistently tight supply conditions.

The structure of the U.S. economy also complicates the connection between oil prices and recession risk. The United States is now one of the world’s largest oil producers and a net energy exporter, a shift that has altered the traditional dynamics of energy shocks. Higher oil prices can benefit domestic producers, supporting investment and jobs in the energy sector. This partly offsets the negative effects on consumers and energy-intensive industries. However, the overall impact remains negative for the broader economy, as the United States is still a large net consumer of oil and petroleum products. The pass-through to gasoline prices has a direct and noticeable effect on household budgets, especially affecting lower- and middle-income consumers who spend a larger share of their income on energy.

Additionally, the inflationary impact of rising oil prices extends beyond just gasoline. Energy costs affect transportation, manufacturing, and food prices, exacerbating overall inflation pressures that can influence monetary policy decisions. If the Federal Reserve responds to increased inflation by maintaining higher interest rates for an extended period, the combined effect of tighter financial conditions and elevated energy expenses could significantly increase the likelihood of a recession. This interaction explains why some analysts consider oil prices in the $140–$150 range to be particularly risky in the current environment, where interest rates are already elevated. At these levels, the economy faces a double challenge: increased costs and more restrictive financial conditions.

Another key factor is how quickly oil prices rise. Sudden increases tend to have a stronger psychological impact on consumers, leading to quick changes in behavior. Rapid jumps in gasoline prices can damage consumer confidence, which then affects spending decisions. This behavioral response can amplify the economic effects of higher energy costs, creating a cycle that accelerates the slowdown. Conversely, gradual increases give time for adjustment, whether through changes in consumption, efficiency upgrades, or switching to alternative energy sources.

Summary and Concluding Thoughts

When evaluating oil prices, our analysis shows that the difference between spot and forward prices is crucial. Although some may argue that the recent peak in oil prices increases the likelihood of a recession, one should not overlook the lower oil price expectations for the future, which suggest that markets do not yet see the shock as lasting long enough to trigger a recession. This explains why recession chances, as indicated by market-based indicators like Polymarket, have decreased even though spot prices are high and near record levels.

Ultimately, it appears as though there is no single price point at which a U.S. recession becomes unavoidable. The often-cited thresholds of $100, $120, or $130 per barrel should be seen as ranges in which risks increase, not as definitive triggers. The true turning point depends on a mix of factors: how long prices stay high, the trend suggested by futures markets, how monetary policy responds, and the economy’s underlying strength. Currently, the gap between high spot prices and more modest forward expectations indicates that, while recession risks are higher, they are not yet definitive.

If oil prices rise sharply and stay high—especially in the $130–$150 range—for a long time, the chances of a recession will undoubtedly rise significantly. Such a situation would probably put steady pressure on consumers, keep inflation persistent, and tighten financial conditions, creating a combination of factors that have historically led to economic contraction. However, if the current increase proves temporary and future oil price expectations remain moderate, the economy might be able to handle the shock without entering a recession.

Oil prices matter not only for where they stand now but also for where they are expected to go. In a market-driven economy, it’s those expectations—reflected in futures curves, financial markets, and consumer sentiment—that ultimately decide whether an oil price shock will trigger a U.S. recession.

Under normal circumstances, trade negotiations between the United States and China would already be among the top diplomatic events on the global economic calendar. These two countries together account for about 40 percent of the world’s economic output. They are deeply integrated into nearly every major supply chain, from semiconductors and aerospace manufacturing to agriculture and consumer goods. However, the trade negotiations in Paris, which began on March 15, 2026, between U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng, have gained even greater importance. What might have been a technical effort to stabilize a fragile trade truce has now become intertwined with one of the most unstable geopolitical crises in recent history: the closure of the Strait of Hormuz following the escalation of the U.S.–Israel conflict with Iran.

In an annual in-person roundtable discussion held in New York City on March 13, 2026, sponsored by CGTN Chinese Television, I discussed the outlook for the Chinese economy ahead of the China-U.S. trade negotiations in Paris. The focus at the event was whether the world’s two largest economies in the world could find common ground at a time when geopolitical tensions were already straining the global system. The forum emphasized that success would require both sides to approach the relationship from a position of mutual respect, recognizing that the economic ties between the United States and China are too large and too interconnected to be managed through conflict alone. However, within days of that discussion, the strategic landscape shifted dramatically when the United States asked China and other major countries to help reopen the Strait of Hormuz, one of the world’s most critical energy chokepoints.

The significance of the Strait of Hormuz to the global economy cannot be overstated. About 20 percent of the world’s oil supply products pass through this narrow waterway daily. In a previous Substack article, “Escorts, Mines, and Drones Near the Strait of Hormuz: Why Insurance Can’t Prevent Attacks,” I argued that even aggressive emergency measures—such as releasing oil from strategic petroleum reserves or providing insurance guarantees to commercial shipowners were unlikely to be enough to compensate for the loss of global energy supplies if the Strait of Hormuz remained closed. Strategic petroleum reserves are meant to offer temporary relief during disruptions, not to permanently replace the steady flow of crude oil from the Persian Gulf. Meanwhile, insurance policies cannot prevent the physical risks posed by missile attacks, drones, or naval confrontations.

This reality has forced policymakers to face an uncomfortable truth: resolving the crisis may require cooperation among strategic competitors with geopolitical differences. That dynamic is now directly affecting the U.S.–China trade negotiations in Paris. What started as an attempt to “iron out kinks” in a fragile trade truce is quickly turning into a broader diplomatic test of whether the two countries can manage their rivalry and work together on issues of global stability.

The evidence so far suggests that the Paris talks are unlikely to result in a complete reset of the U.S.–China relationship. Instead, they appear to serve as a waypoint—a temporary pause on a much longer and more complex journey. In this way, the talks act as a tactical effort to stabilize relations before President Trump’s state visit to Beijing to meet with Chinese President Xi Jinping. Although the grand meeting between the two leaders was expected to begin on March 31, 2026, the timing is now uncertain and may depend on whether the two countries can cooperate to open the Strait of Hormuz. The goal is not to solve every fundamental disagreement but to prevent tensions from escalating into a full-scale economic confrontation that could destabilize global markets.

The fragile nature of the current truce reflects the turbulent history of trade relations between the two countries over the past several years. During the peak of the trade conflict in 2025, tariffs imposed by the United States exceeded 100 percent on certain Chinese imports, with some levies reportedly reaching nearly 145 percent. These measures were partially rolled back after a truce was reached in November 2025, but the underlying tensions remain unresolved. Financial markets stay cautious because the structural issues fueling the trade war—industrial policy, technology competition, and geopolitical rivalry—still haven’t disappeared.

Adding another layer of complexity, the legal tools used by the United States to impose tariffs have become a source of uncertainty. Earlier this year, the U.S. Supreme Court struck down the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose broad tariffs, removing one of the administration’s most aggressive trade tools. In response, Washington quickly shifted toward launching new investigations under Section 301 of the Trade Act, targeting industrial overcapacity and other trade practices among multiple countries, including China. From Beijing’s perspective, this swift change in legal strategies reinforces its long-standing concern about what it sees as inconsistency in U.S. trade policy.

Chinese officials have repeatedly argued that the success of any long-term agreement relies on policy stability. Beijing’s negotiating stance increasingly stresses the importance of predictable rules rather than temporary arrangements that can be undone by domestic legal or political shifts in the United States. This concern has fueled the perception in China that U.S. trade policy sometimes follows a “good cop, bad cop” pattern, where diplomatic assurances are undercut by enforcement actions from other branches of the U.S. government.

Despite these tensions, the economic incentives for both sides to keep a working relationship are still strong. One of the biggest immediate pressures on Washington has been the rise of supply chain vulnerabilities linked to China’s dominance in rare earth minerals. These materials are crucial components for many industries, including aerospace manufacturing, semiconductor production, and advanced electronics. Shortages of specific elements like yttrium have already started causing delays for U.S. companies, giving the United States a practical reason to maintain at least some level of trade cooperation.

At the same time, China also faces incentives to stabilize relations with the United States. The Chinese economy remains deeply integrated with global markets, and ongoing trade friction with its largest export destination could complicate Beijing’s efforts to sustain economic growth. As a result, both countries seem motivated to pursue what could be described as a strategy of “managed competition,” where they continue to compete in strategic sectors like artificial intelligence and semiconductors while preventing that competition from escalating into uncontrolled economic conflict.

The sudden connection between trade negotiations and the Strait of Hormuz crisis adds a new layer to this already complex relationship. The United States is now trying to persuade China and other countries to form a coalition to help reopen the waterway, possibly through diplomatic pressure on Iran or other forms of coordination. The chances that China will join a U.S.-led military coalition remain relatively low in the near term, mainly because Beijing has traditionally avoided direct military involvement in Middle Eastern conflicts. Instead, China seems to be pursuing a parallel approach focused on diplomatic engagement and economic influence.

China’s influence over Iran mainly comes from its role as the country’s biggest energy customer. This relationship allows China to push behind the scenes, encouraging Tehran to avoid actions that could completely block shipping lanes. Recently, there have even been reports that some commercial vessels have tried to signal Chinese ownership or cargo to decrease the chance of being targeted while passing through the strait.

However, from Beijing’s perspective, the economic incentives to keep the Strait of Hormuz open are substantial. China gets about 40% of its oil imports through this corridor, meaning that a long-lasting disruption could threaten both economic growth and price stability. Higher energy prices would ripple through manufacturing costs, transportation networks, and consumer markets, potentially undermining the country’s broader economic goals. As a result, China has a strong interest in preventing the situation from escalating into a prolonged blockade.

At the same time, Beijing is likely to see the crisis as an opportunity to gain concessions in other parts of the U.S.–China relationship. One possible bargaining chip involves the ongoing Section 301 investigations launched by the United States into industrial overcapacity and other trade practices. China might seek exemptions or suspensions of these investigations as part of a broader diplomatic agreement tied to cooperation on global energy security.

Such a link would demonstrate how modern geopolitics increasingly combines economic and security issues into a single negotiation framework. Trade disputes, energy security, and regional conflicts are no longer separate; instead, they form an interconnected system where progress in one area can affect outcomes in another.

Summary and Concluding Thoughts

The trade negotiations in Paris are about more than just another chapter in the long-standing economic competition between the United States and China. They have become a focal point for a much broader question facing the global economy, namely, whether the world’s two largest powers can manage their competition in a way that maintains stability during times of crisis.

If the talks succeed in strengthening the fragile trade truce while also encouraging cooperation on reopening the Strait of Hormuz, the outcome could serve as a temporary but meaningful stabilizing force for global markets. Energy prices would likely decrease, supply chains would become more predictable, and financial markets might start to reflect a lower chance of severe economic disruption. However, if the negotiations fail, the consequences could go well beyond bilateral trade flows. A breakdown in cooperation between Washington and Beijing at a time when the global energy system is already under stress could threaten to increase volatility across commodity markets, inflation expectations, and financial conditions worldwide.

In that sense, the Paris talks between the United States and China are a key test of whether strategic rivalry can coexist with practical cooperation. For the global economy—already dealing with geopolitical shocks, energy disruptions, and changing supply chains—the answer to this question could shape the global economic outlook for years to come.

Every March, China hosts one of its most important political and economic events: the annual meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference. Known collectively as the “Two Sessions,” these meetings serve as the country’s main policy-making forum and provide a road map for economic priorities in the upcoming year. The March 2026 Two Sessions’ meetings were particularly significant because they marked the official start of China’s 15th Five-Year Plan, covering 2026 to 2030. In 2027, China will provide more details on its current five-year plan, followed by a mid-term evaluation in 2028.

There have been many five-year plans, but one that stands out is the five-year plan that began in 1981, when Deng Xiaoping sought to open up China’s economy to the world. What followed was a surge in the number of factories established to produce goods more efficiently for global markets. This initiated a rise in product outsourcing to China. Undoubtedly, this is where the roots of discontent for the current Washington administration began, as they lament the loss of U.S. manufacturing jobs, which suddenly vanished as production moved to China at lower costs, fueling the Asian nation’s economic growth.

Fast-forwarding to the current five-year plan, China has chosen to forgo the rapid growth that characterized earlier decades and is shifting toward what officials call “high-quality development.” This approach emphasizes technological self-reliance, disciplined industrial growth, and increased domestic consumption, rather than broad stimulus or property-driven expansion. For U.S. companies and global investors evaluating opportunities in China, the policies announced during the 2026 Two Sessions. It is also important to note that this plan offers a complex mix of opportunities, caution, and structural uncertainty associated with the current geopolitical environment dominated by widespread protectionism. Against this backdrop, China is promising to open its economy by stabilizing export growth and encouraging countries to export more goods to China, as it seeks peaceful coexistence with the rest of the world. It also hopes to negotiate its trade policies with other nations in good faith, from a position of mutual respect.

One notable takeawayfrom the conference was the government’s decision to set a gross domestic product growth target of roughly 4.5% to 5% for 2026. This marks the lowest official target in decades and indicates Beijing’s willingness to accept slower growth while pursuing structural reforms. In earlier periods, China relied heavily on credit expansion, infrastructure spending, and property development to sustain headline growth rates that sometimes exceeded 8%. In contrast, the current leadership seems focused on shifting growth towards productivity gains, advanced manufacturing, and consumption. For investors, the lower target isn’t a sign of weakness but a reshaping of expectations. Policymakers appear to be emphasizing that stability and sustainability are now more important than rapid economic growth.

Source: International Monetary Fund (IMF)

Fiscal policy for the upcoming years is also expected to follow this targeted strategy. China set an official fiscal deficit ratio close to 4% of GDP for 2026, indicating that the government plans to allocate resources in a focused way rather than through large-scale stimulus. Analysts often describe this approach as “surgical” industrial policy. Of course, the actual government deficit, which includes off-budget spending, is often much higher. Fitch Rating estimates that the actual broader fiscal deficit in 2026 will average about 7.8% when we include other government-managed spending.

China expects to direct spending toward strategic sectors such as artificial intelligence, semiconductor manufacturing, advanced aerospace systems, and biotechnology. This focused approach could create highly attractive opportunities for companies working in specialized technologies.

Source: China’s Government Work Report

A key part of the latest five-year plan is the government’s effort against what Chinese regulators call “Anti-Involution.” The term describes excessive competition and overinvestment in certain industries that eventually lead to overcapacity, falling prices, and shrinking profits. Chinese officials have highlighted industries such as heavy manufacturing, electric vehicles, and certain industrial inputs as areas of fierce price competition that have harmed corporate financial health. By promoting production discipline and discouraging excessive capacity expansion, regulators aim to stabilize prices and improve long-term profitability. For investors, the “Anti-Involution” effort may create a more predictable environment.

Technology development is at the core of the 15th Five-Year Plan. One of the key initiatives from the Two Sessions is the “AI Plus” initiative, which aims to integrate artificial intelligence into nearly every sector of the Chinese economy. Policymakers see AI applications in manufacturing, logistics, healthcare, energy management, and financial services. The government has targeted the artificial intelligence industry to reach a value of about 10 trillion yuan ($1.45 trillion) by 2030. The goal is to integrate AI into 90% of the national economy by 2030. This initiative shows China’s commitment to closing technological gaps with the United States and other advanced economies while creating new sources of productivity growth

Closely linked to the AI initiative is a broader push into strategic emerging industries. The government has identified integrated circuits, aviation, aerospace technology, advanced robotics, and biomedicine as sectors deserving significant policy support. These industries are seen not only as drivers of economic growth but also as pillars of national security and technological independence. U.S. companies specializing in high-end components, industrial software, scientific instruments, or advanced manufacturing tools may find opportunities in these sectors, especially where Chinese domestic capabilities are limited. However, foreign firms should also recognize that these same sectors are receiving substantial government subsidies and support.

Another structural change discussed during the Two Sessions relates to China’s demand for raw materials. For most of the past twenty years, China’s construction boom caused high demand for steel, cement, and iron ore. As the government gradually reduces dependence on property and infrastructure development, the composition of commodity demand is shifting. The new focus is now on electrification, renewable energy, and digital infrastructure, which will increase the demand for metals like copper and lithium. These materials are essential for electrical grids, battery systems, and advanced communication networks. Investors in global commodity markets might see China’s shift toward a digital and electrified economy as a major driver of demand for these metals.

Domestic consumption remains a vital pillar of the new growth strategy. Chinese policymakers have long acknowledged that household spending accounts for a smaller portion of GDP compared to most advanced economies. Therefore, the government is implementing policies to boost spending, especially in lower-tier cities where consumer markets are less developed. These initiatives include trade-in programs that encourage consumers to replace older appliances and vehicles with energy-efficient models, as well as policies aimed at expanding services for the country’s aging population. The “silver economy,” which includes healthcare, elder care, and specialized services for seniors, is expected to become an increasingly significant driver of economic activity as China’s demographics continue to shift.

From a regulatory perspective, the 2026 Two Sessions aimed to reassure foreign investors that China remains open to international business. The government reaffirmed its commitment to providing “national treatment” for foreign enterprises, a principle that theoretically guarantees foreign companies receive the same legal and regulatory treatment as domestic firms. Additionally, the government introduced a revised catalog of industries that actively encourages foreign investment. The updated list includes hundreds of new or expanded categories across advanced manufacturing, biotechnology, robotics, digital services, and green energy systems. Companies operating in these sectors may benefit from preferential policies like tax incentives, tariff exemptions on specialized equipment, and priority access to land for new facilities.

The government is also working to strengthen legal protections for private businesses through new regulatory frameworks. The proposed Private Sector Promotion Law aims to ensure that privately owned companies—both domestic and foreign- receive fair access to financing, land, and other production factors. Meanwhile, a new Financial Stability Law is designed to reduce systemic risks within the banking system and capital markets. These reforms are part of China’s broader goal to transform itself into what officials call a global financial powerhouse.

Capital markets reforms may also support China’s innovation strategy. The country’s securities regulator plans to introduce more flexible listing rules for technology firms on the ChiNext board of the Shenzhen stock exchange. By easing listing requirements and encouraging venture capital participation, policymakers aim to direct more funding to early-stage technology companies. For global investors, these reforms could broaden access to Chinese innovation sectors that were previously difficult to reach through public markets.

Despite these policy initiatives, the success of China’s new development model remains uncertain. One of the most persistent challenges is the ongoing decline in the country’s property sector. For years, real estate development has been a major source of employment, household wealth, and local government revenue. The government’s decision to reduce reliance on property development has stabilized some financial risks but has also removed a crucial engine of economic growth. While policymakers are promoting urban renewal projects and strategic housing reserves, the sector is unlikely to return to its previous role as a primary growth driver.

Another major challenge involves consumer confidence. Chinese households have traditionally maintained high savings rates, partly because of limited social safety nets and uncertainty about future healthcare or retirement expenses. Although the government is implementing policies aimed at boosting consumption, it remains unclear whether these measures will be enough to significantly change long-standing household behavior. Without stronger consumer spending, China’s shift toward a consumption-driven economy might move more slowly than policymakers hope.

External economic pressures also challenge China’s ambitions. Growing protectionism in major Western economies has created new obstacles for Chinese exports, especially in advanced technologies. Trade restrictions, tariffs, and investment screening measures have heightened geopolitical competition between China and several advanced economies. In response, China is increasingly pursuing closer economic ties with countries in the Global South. These efforts include expanding trade partnerships, financing infrastructure projects, and implementing new market access policies to boost imports from developing economies.

More recently, China’s foreign minister, Wang Li, has described “trade protectionism” as “akin to locking oneself in a dark room.” His comments echo Beijing’s effort to present itself as a reliable trading partner dedicated to open markets. An example of this strategy is the decision by China to grant zero-tariff access to imports from 53 African countries starting in 2026.

The latest five-year plan (2026-2030) will also serve as the official mandate for the Chinese delegation at the upcoming meetings in Paris (March 15-17, 2026), in preparation for the meetings between President Trump and President Xi in China at the end of March 2026.

Summary and Concluding Thoughts

For U.S. companies operating in China, the latest five-year plan presents both opportunities and challenges. On one hand, the government’s emphasis on technological advancement and boosting domestic consumption creates opportunities across various sectors, from advanced manufacturing equipment to healthcare services and digital infrastructure. Companies that align their strategies with China’s national priorities may experience strong demand for their expertise and products. On the other hand, foreign firms must navigate a complex regulatory environment that increasingly emphasizes data security, environmental compliance, and supply chain localization.

Competition is also growing as Chinese companies advance quickly up the technological value chain. Government backing for local innovation means that foreign firms might face competition from well-funded Chinese rivals in areas that multinational corporations previously led. Therefore, successful foreign companies are likely those that establish local research centers, form partnerships with Chinese institutions, and adjust their business models to fit local market conditions.

In that sense, the 2026 five-year plan represents more of a transition than a definitive turning point. China’s leadership seems committed to restructuring the economy around innovation, efficiency, and consumption rather than relying on infrastructure spending and credit expansion to support economic growth. For U.S. companies and other global investors, the message is clear: China remains one of the world’s most significant economic markets, but participation will increasingly require alignment with national strategic priorities and careful navigation of an evolving regulatory environment. Whether the new strategy ultimately delivers the high-quality growth Beijing aims for will also be determined by how it navigates its intricate relationship with the United States, Europe, and the rest of the world.

The narrow maritime passage known as the Strait of Hormuz has long been regarded as one of the most geopolitically sensitive chokepoints in the global energy system. Roughly one-fifth of the world’s petroleum supply transits this corridor, making it a critical artery for the international economy. Even small disruptions can ripple through global markets, affecting oil prices, shipping costs, and ultimately inflation and economic growth. In recent weeks, renewed tensions involving Iran and Western powers have highlighted just how precarious the situation remains. The events unfolding around the Strait over the last couple of days illustrate a broader reality: even when military superiority appears clear, the asymmetric tactics available to regional actors can create persistent and costly risks for global energy transport.

On Monday, March 9, 2026, I discussed these concerns during a live appearance on Fox Business with host Stuart Varney (see link to this interview at the end of the article. During the segment, I argued that while the United States and its allies had significantly degraded Iran’s conventional naval capabilities, the threat environment in the Strait of Hormuz remained serious. Specifically, I noted that Iran possesses the capacity to deploy between 5,000 and 6,000 naval mines in the region. Such a number would not necessarily shut down the strait immediately, but it would introduce an enormous level of uncertainty and danger for commercial shipping. Mines do not need to sink many vessels to have a powerful economic effect; even a small number of incidents can prompt insurers, shipowners, and crews to reconsider operating in the area.

Naval mines represent only one dimension of the asymmetric threat. Iran has long invested in tactics designed to offset the technological superiority of larger naval forces. During the interview, I emphasized that despite the U.S. military striking large portions of Iran’s navy and bombing infrastructure, other risks remained very real. Fast attack craft—small, agile speedboats capable of swarming larger vessels—continue to pose a challenge. Even in the presence of naval escorts, these boats can attempt harassment attacks, fire rockets, or deploy explosives at close range. Their effectiveness is not necessarily measured in the number of ships destroyed, but in their ability to raise uncertainty and insurance costs.

Developments in the days following the interview reinforced the seriousness of the threat. Just twenty-four hours later, reports indicated that U.S. forces had destroyed sixteen Iranian mine-laying boats near the strait, underscoring the extent to which mine warfare was a tangible concern instead of a hypothetical one. The destruction of these vessels suggested that coalition forces were actively monitoring attempts to deploy additional mines in the region. Yet the episode also revealed the difficulty of completely neutralizing such threats. Mine warfare is inherently low-cost and highly scalable; vessels capable of laying mines are relatively inexpensive and can operate in dispersed formations, making total elimination extremely difficult. The impact of these risks is evident in the plunge in the number of tankers passing through the Strait of Hormuz in recent days!

A significant portion of my live TV segment focused on the economic implications of these risks, particularly the rising cost of maritime insurance. As the risk of conflict intensified, insurers dramatically increased premiums for vessels traveling through the Strait of Hormuz. Historically, coverage for a tanker’s cargo might have cost roughly 0.25 percent of the cargo’s value, ranging from $50 million to $100 million. In the current environment, those premiums have reportedly surged to as high as 3.0 percent (in some cases up to $3 million, compared with $250,000 before the U.S.-Iran conflict). At the high end of that range, a single voyage can now cost several million dollars in insurance premiums, dramatically altering the economics of transporting oil through the strait.

Recognizing the importance of maintaining global energy flows, policymakers in Washington proposed a partial solution. The U.S. government indicated that it would subsidize the cost of insurance for vessels willing to transit the strait. The intention behind the policy was straightforward: by lowering the financial burden of insurance, more ships would be willing to continue operating along the route, preventing a severe disruption in global oil supply. In principle, the strategy addresses one of the most immediate economic barriers created by geopolitical tension.

However, during the interview, I cautioned that subsidizing insurance does not eliminate the underlying risk. Insurance can offset financial losses after an incident, but it cannot prevent the incident or loss of life. I posed a simple question during the broadcast: even if the insurance were inexpensive, would someone personally be willing to join the crew of a tanker sailing through the Strait of Hormuz under current conditions? The issue is not merely financial but human. Ships carry crews whose lives are directly at risk if a vessel is attacked, set ablaze, or sunk.

One emerging concern is the widespread use of drones by Iran, which is estimated to manufacture up to 10,000 per month, a production capacity that dramatically expands its ability to conduct asymmetric attacks. Drones can be launched from land, ships, or concealed positions along the coastline. Even a single successful strike on a tanker could ignite cargo or damage critical systems, potentially causing catastrophic fires and loss of life.

Public rhetoric from political leaders has also entered the debate. President Trump stated that with Iran’s navy largely decimated, ship owners should “show some guts” and have the courage necessary to keep trade moving through the strait. But in addition to naval mines and fast attack craft, analysts have noted that Iran possesses divers capable of attaching explosive devices directly to the hulls of passing ships. These “limpet mine” style attacks are difficult to detect and can be executed covertly at night or in congested waters. The tactic has historical precedent and represents another example of how relatively low-tech methods can generate significant disruption in maritime trade.

The dangers became even more tangible on the morning of March 11, 2026, when three cargo ships, including one in the Strait of Hormuz, were struck by projectiles. Early reports from this incident were still emerging. Still, the incident served as a reminder that Iran’s warnings about ships transiting the Strait of Hormuz were not merely rhetorical. Even isolated attacks can have disproportionate consequences for global markets, as traders and shipping companies reassess the safety of the route.

The economic ramifications extend beyond insurance costs and vessel safety. According to estimates discussed in a March 10, 2026, podcast produced by The Economist, “Anatomy of an Oil Shock,” the full cost of escorting ships through the Strait of Hormuz may be extraordinarily high. When one includes the operational expenses associated with deploying naval escorts, maintaining air surveillance, and coordinating security operations, the total cost of protecting a tanker could equal—or even exceed—the value of the cargo it carries. Such a scenario would represent a profound distortion of normal market economics. Oil transportation is typically profitable because shipping costs represent a small fraction of the cargo’s value. If security expenses rise to match or surpass that value, the fundamental economics of the trade begin to break down.

Beyond direct costs, logistical constraints also limit the effectiveness of large-scale escort operations. The Strait of Hormuz is already one of the busiest maritime passages in the world. On average, approximately eighty vessels pass through the strait each day. Introducing military escort requirements complicates traffic management and reduces throughput. Coordinating convoys, establishing secure transit windows, and ensuring adequate naval protection all require time and resources. As a result, the number of ships capable of transiting safely could fall dramatically.

Some analysts estimate that under a heavily escorted system, daily traffic might decline to only ten or twenty ships. Such a reduction would have profound consequences for global energy markets. If roughly 20 percent of the world’s petroleum supply normally flows through the strait, a severe reduction in shipping capacity would inevitably create shortages elsewhere in the system. Even if some production could be rerouted through pipelines or alternative export routes, the adjustment would likely be incomplete and slow.

Oil markets are highly sensitive to disruptions of this scale. A significant reduction in supply from the Persian Gulf region would almost certainly push prices higher, at least in the short term. Energy traders tend to react quickly to geopolitical risk, incorporating potential supply disruptions into futures contracts. If the Strait of Hormuz becomes persistently hazardous or economically impractical to transit, the resulting supply uncertainty could produce substantial volatility in global oil prices.

Higher oil prices carry broader macroeconomic implications as well. Energy costs influence transportation expenses, manufacturing input prices, and consumer fuel costs. In many economies, sustained increases in oil prices contribute to inflationary pressures while simultaneously dampening economic growth. The combination of higher costs and slower growth presents difficult policy challenges for central banks and governments alike.

Summary and Concluding Thoughts

The unfolding situation around the Strait of Hormuz, therefore, illustrates a critical point about modern geopolitical risk. Military victories or tactical successes—such as destroying mine-laying boats or degrading a regional navy—do not necessarily eliminate the underlying vulnerabilities of global supply chains. In an era of asymmetric warfare, relatively inexpensive tools such as mines, drones, and small attack craft can generate disproportionate disruption.

Ultimately, the challenge facing policymakers and market participants is balancing security, economic feasibility, and human risk. Subsidized insurance and naval escorts may help maintain some level of shipping activity, but they do not fully solve the problem. If the costs of protection exceed the value of the cargo and the dangers to crews remain substantial, the incentive to avoid the strait altogether becomes stronger.

The events of the past several days—from the destruction of Iranian mine-laying boats to the reported attack on a tanker within the last couple of hours demonstrate that the Strait of Hormuz remains one of the world’s most fragile strategic chokepoints. As long as tensions persist and asymmetric threats remain viable, the global energy system will continue to operate under a cloud of uncertainty. For oil markets, that uncertainty alone can be enough to keep financial markets on edge by reminding the world just how dependent modern economies remain on a narrow stretch of water only a few miles wide.

https://video.foxbusiness.com/v/6390633214112

The sudden surge in oil prices during early 2026 has once again placed energy markets at the center of the macroeconomic outlook. West Texas Intermediate (WTI) crude has climbed sharply from roughly $60 per barrel at the end of January 2026 to levels that briefly touched $115 in the last 24 hours. Such a move represents one of the most rapid increases in oil prices since the early stages of the Russia–Ukraine conflict in 2022. Economic Research from the Federal Reserve, academic studies, and Wall Street institutions finds that sustained increases in oil prices exert measurable effects on inflation, economic growth, and labor market conditions. A commonly cited rule of thumb across these sources is that every sustained $10 increase in the price of WTI crude adds roughly 0.3 percentage points to the Personal Consumption Expenditures (PCE) price index, subtracts approximately 0.2 percentage points from real GDP growth, and raises the U.S. unemployment rate by about 0.1 percentage points over a 12-to-18-month horizon. Applying those relationships to the current oil shock suggests that the surge in energy prices could meaningfully reshape the economic landscape during the remainder of 2026.

Source: Reuters

The importance of these relationships lies in the central role energy costs play in modern economic systems. Oil is both a direct consumption good and a critical input into transportation, manufacturing, and logistics. When oil prices rise sharply, households feel the effects immediately through higher gasoline and heating costs. Businesses experience the impact through rising input prices, particularly in sectors such as transportation, airlines, chemicals, plastics, agriculture, and manufacturing. Because energy costs ripple through supply chains, the result is often a broad-based increase in consumer prices. Federal Reserve research has documented that the pass-through from oil prices to inflation occurs both directly through energy components and indirectly through transportation and production costs embedded in a wide range of goods and services. As a result, economists frequently use oil price movements as an early indicator of future inflation pressures.

Applying the widely cited multiplier of 0.3 percentage points of PCE inflation for every $10 rise in oil suggests that the recent surge in WTI could add significantly to inflation over the next year if sustained. From roughly $60 (in January 2026) to $115, the increase in oil prices amounts to about $55 per barrel. If maintained, the historical relationship implies upward pressure on PCE inflation of roughly 1.5 to 1.7 percentage points. That estimate does not necessarily imply that inflation will rise by that full amount immediately, because the transmission occurs gradually and may be dampened by currency movements, hedging practices, and government policy responses. Nevertheless, the directional implication is clear: rising oil prices tend to push the Federal Reserve’s preferred inflation measure upward. Some Wall Street estimates suggest that under current conditions, headline PCE inflation could move toward the 3.5 percent to 3.7 percent range later in 2026 if energy prices remain elevated. That would represent a notable departure from the Federal Reserve’s long-standing 2 percent inflation target.

The growth implications of higher oil prices tend to operate through several channels simultaneously. First, rising energy costs function as a tax on consumers by reducing disposable income available for discretionary purchases. When gasoline prices climb, households typically reallocate spending toward energy and away from other categories such as retail goods, travel, and entertainment. However, as the chart below reveals, after the U.S. became a net energy exporter in 2020, the economy became more resilient to rising energy prices, which may explain why the oil price surge in 2022 didn’t lead to a U.S. recession!

Second, businesses facing higher energy and transportation costs often pass those costs on to consumers or absorb them through lower profit margins. Either outcome can reduce economic activity: higher prices dampen demand, while lower profits discourage investment and hiring. Third, geopolitical tensions that often accompany oil shocks tend to weigh on financial markets and consumer confidence. Equity market declines and heightened uncertainty frequently lead households to postpone major purchases, further slowing economic momentum. Consumers become less ebullient and typically cut back on spending when they are reading headlines of war hostilities resulting in U.S. soldier fatalities.

Empirical research from the Federal Reserve Bank of St. Louis and other institutions supports the view that oil shocks can have meaningful effects on employment. Studies using structural vector autoregression models have found that oil price spikes often lead to declines in manufacturing employment and broader labor market softening over subsequent quarters. Estimates indicate that a 20 percent increase in oil prices can lead to a roughly 1 percent decline in manufacturing employment over 18 months. Because manufacturing remains closely tied to transportation and energy costs, it tends to be among the first sectors affected by rising oil prices. These sectoral adjustments often ripple through the broader economy, eventually raising the overall unemployment rate.

The consensus among many economists is that a $10 increase in oil prices raises the U.S. unemployment rate by approximately 0.1 percentage points. If applied to the recent $55 increase in WTI prices, this relationship implies that the unemployment rate could eventually rise by roughly half a percentage point if the shock persists. With the U.S. unemployment rate already edging up to about 4.4 percent in February 2026, that dynamic could push it closer to 4.9 percent, or even 5 percent, over the next year. Such a shift would represent a meaningful change in labor market conditions after several years of historically tight employment. The increase would likely occur gradually as higher energy costs slow hiring and investment rather than through an abrupt surge in layoffs.

Real GDP growth would likely experience a similar headwind. The conventional estimate that every $10 rise in oil subtracts about 0.2 percentage points from real GDP implies that the recent oil surge could shave roughly 1 percentage point from annual growth if sustained. This estimate aligns broadly with research from institutions such as TD Economics, S&P Global, and Goldman Sachs, which have noted that high oil prices historically reduce economic activity through both consumption and investment channels. If the U.S. economy was previously expected to grow around 2 percent in 2026, such an adjustment could bring growth closer to the 1 percent range under sustained high energy prices.

The potential combination of rising inflation and slowing growth raises the specter of stagflation, reminiscent of the economic conditions of the 1970s. Stagflation refers to the unusual coexistence of elevated inflation, weak economic growth, and rising unemployment. Oil price shocks played a central role in the stagflation episodes of that decade, when supply disruptions in the Middle East led to dramatic increases in energy costs. While today’s economic structure differs significantly from that period, the basic mechanism linking energy prices to inflation and economic slowdown remains relevant. Higher oil prices simultaneously raise production costs and reduce consumer purchasing power, creating conditions that can push inflation higher even as growth slows.

Financial markets have already begun to reflect these risks. According to some market estimates, global equities have already lost roughly $6 trillion in value during the recent selloff triggered by escalating geopolitical tensions and rising energy prices. Such losses can amplify economic headwinds by tightening financial conditions. When equity markets decline sharply, households experience a reduction in wealth that often leads to more cautious spending behavior. Corporations may also delay capital expenditures or hiring plans amid heightened uncertainty. These financial effects can reinforce the direct economic impact of higher energy costs.

At the same time, market-based indicators suggest that investors are reassessing the risk of a recession. Betting markets and probability models have increased their estimates of the likelihood of a U.S. recession over the next year. For example, some estimates show recession probabilities rising from roughly 21 percent in late February to around 34 percent following the outbreak of hostilities in the Middle East. While such probabilities remain well below levels typically associated with an imminent recession, the shift indicates growing concern that energy prices could weigh on economic activity. Historically, nearly every major oil price spike since the 1970s has been followed by a U.S. recession, although the timing and magnitude of the downturn have varied widely.

One notable exception occurred in 2022, when oil prices surged following the invasion of Ukraine, but the U.S. economy avoided a recession. Many attribute this resilience to structural changes in the energy sector. Over the past decade, the United States has become one of the world’s largest oil producers due to technological advances in shale extraction. As a result, the U.S. economy is less vulnerable to oil shocks than it was during earlier decades when it relied heavily on imports. Domestic energy production provides a partial offset to higher oil prices because rising prices stimulate investment and employment in the energy sector. States with significant oil and gas production can experience economic gains that partially offset losses elsewhere in the economy.

Nevertheless, the United States remains deeply integrated into global energy markets. Even though it has at times become a net exporter of petroleum products, global oil prices still determine domestic gasoline and diesel prices. Supply disruptions on major transit routes, therefore, continue to affect the U.S. economy. The closure or severe disruption of the Strait of Hormuz—one of the world’s most important oil shipping lanes—represents precisely the type of supply shock that can drive large price movements. Roughly one-fifth of globally traded crude oil passes through this narrow waterway each day. When shipping through the Strait is interrupted, global oil supplies can tighten rapidly, pushing prices higher.

This context is important when evaluating whether the recent surge in oil prices reflects market fear or underlying fundamentals. In many past episodes, oil price spikes were driven primarily by speculative trading or geopolitical uncertainty rather than immediate physical shortages. In the current situation, however, there is strong evidence that fundamental supply disruptions are playing a central role. If shipping volumes through a critical transit route decline sharply, the global oil market loses access to a substantial portion of its available supply. Even if the disruption is temporary, traders and refiners must compete for reduced shipments in the near term, driving prices upward.

Financial markets often amplify these movements because traders attempt to price in the probability of future shortages. The result is that prices can rise beyond what current supply conditions alone might justify. In that sense, both fundamentals and fear tend to interact. A genuine supply disruption creates the initial price increase, while uncertainty about the disruption’s duration and severity encourages additional risk premiums in futures markets. The recent surge in WTI, therefore, likely reflects a combination of both factors. However, the underlying catalyst appears to be a real constraint on global supply rather than purely speculative activity.

For the Federal Reserve, the economic effects of rising oil prices create a tough policy choice. Central banks usually lower interest rates in response to slowing growth and higher unemployment. But they also increase rates when inflation exceeds the target. An oil shock that boosts inflation while weakening economic activity puts policymakers in a difficult spot. Some analysts say this outcome places the U.S. central bank in a “no-win situation“ because any policy move will exacerbate one of its two mandates.

Summary and Concluding Thoughts

At the end of the day, if oil prices remain elevated and begin to push inflation significantly above target, the Federal Reserve may face pressure to maintain relatively restrictive monetary policy to prevent inflation expectations from rising. At the same time, a weakening labor market and slower economic growth could argue for rate cuts to support economic activity. In our view, the most likely outcome would still lead the Fed to reluctantly lower short rates if the labor market deteriorates, even if inflation remains above target. In such a scenario, however, longer-term interest rates could rise relative to short-term rates, producing a steeper yield curve rather than the lower mortgage rates everyone was expecting with monetary easing.

Ultimately, the macroeconomic impact of the current oil shock will depend heavily on its duration. If energy prices retreat within a couple of weeks, as geopolitical tensions ease and the Strait of Hormuz reopens as the risk of drone attacks on ships diminishes, investors and consumers will react as though all this drama was much ado about nothing! However, if oil prices remain elevated for an extended period, the cumulative impact on inflation, employment, and economic growth could become more pronounced, and lead Fed policymakers to have to imbibe an unpleasant cocktail of higher inflation and higher unemployment rates at future policy meetings while determining the course of short-term interest rates!

The United States labor market is increasingly described as a “low-hire, low-fire” environment. The phrase appears frequently in commentary whenever analysts opine on U.S. labor market conditions. In late 2025 and early 2026, the data appeared to support that characterization. Hiring rates declined, layoffs remained historically low, and job openings fell significantly from the extraordinary highs recorded in 2022. Yet the shorthand description of a “low-hire, low-fire” labor market can be misleading if interpreted literally. The raw scale of labor market activity in the United States remains immense. Even in a period widely described as slow, the U.S. economy continues to record more than 5 million hires and roughly the same number of total job separations each month. These figures illustrate that the American labor market remains highly dynamic despite lower hiring rates and declining job mobility. Understanding this distinction between labor market volume and labor market turnover is essential to evaluating the true state of employment conditions during the current expansion.

Source: U.S. Bureau of Labor Statistics (JOLTS Monthly Survey)

Source: U.S. Bureau of Labor Statistics (JOLTS Monthly Survey)

The JOLTS data, which began in December 2000, provides a useful historical perspective on the current cycle. Across the major expansions covered by the data, the average number of monthly hires has ranged from roughly 4.7 million to 6.2 million, depending on the economic cycle and the size of the labor force. From November 2001 to December 2001, the average monthly hires were 5.1 million, while total separations were 5.0 million. In contrast, during the current economic expansion from April 2020 to present, both the average number of individuals being hired and the average number of total separations surged to higher levels!

Source: U.S. Bureau of Labor Statistics (JOLTS Monthly Survey)

In short, arguing that firms are neither hiring nor firing workers is misleading. Still, the reason analysts get away with this statement is simply that their analysis reflects that the U.S. labor market has grown over time. Given this, they often use total hiring rates and total separation rates. As one can see, U.S. hiring rates have moved lower, but they are not near all-time lows and may reflect other underlying trends.

Source: U.S. Bureau of Labor Statistics (Monthly JOLTS Survey)

The underlying trend driving this decline in the U.S. hiring rate is not entirely due to companies’ reluctance to hire workers.

Source: U.S. Bureau of Labor Statistics (Monthly JOLTS Survey)

Why is the Hiring Rate So Low?

The underlying trend driving this decline in the U.S. hiring rate is not entirely due to companies’ reluctance to hire workers. Instead, one of the major reasons for the decline in the U.S. hiring rate is simply that the worker quit rate has plunged. In fact, labor market research consistently finds that about 60 percent of hires are made to replace workers who have quit or otherwise left their jobs.

In 2022, a period often described as the “Great Resignation,” the U.S. quit rate surged to roughly 3.0 percent. Millions of workers voluntarily left their jobs in search of higher wages, improved working conditions, or new career opportunities. That wave of job mobility generated enormous demand for replacement hires because employers needed to fill positions vacated by departing employees. In fact, labor market research consistently finds that around 60 percent of hires are conducted to replace workers who have quit or otherwise left their jobs.

Since that peak, however, the quit rate has fallen sharply. By late 2025, it had declined to roughly 2.0 percent. This reduction in voluntary job changes has had a direct effect on hiring activity. When fewer workers leave their positions, fewer vacancies are created, and employers have less need to hire additional workers. Consequently, a decline in quits automatically reduces the number of hires required to maintain stable employment levels.

These highlight an often-overlooked element of the “low-hire” narrative. A slower hiring rate does not necessarily mean that employers are unwilling to hire. Instead, it may simply reflect that fewer workers are leaving their jobs, and therefore fewer vacancies need to be filled. In other words, part of the decline in hiring activity might be due to greater worker caution rather than solely to employer restraint. Several factors may explain the recent decline in quits. One possibility is that workers see fewer attractive opportunities in the labor market than they did during the peak of the post-pandemic expansion. Job openings have fallen sharply from their 2022 highs. According to the JOLTS survey, openings declined to their lowest level since the pandemic began. At the same time, the ratio of job openings to unemployed workers has dropped significantly from its peak of roughly two available jobs per unemployed person in early 2022 to less than one job per unemployed worker. Another factor affecting the labor supply side of the market involves demographic trends and migration patterns. The availability of workers plays a critical role in determining hiring outcomes. Recent enforcement actions and policy changes related to immigration have contributed to large numbers of voluntary and involuntary removals of non-citizens from the United States. Data from the U.S. Department of Homeland Security indicate that deportations and removals have increased significantly in recent years. When individuals are removed from the country or otherwise exit the labor force due to immigration enforcement, they are no longer available to participate in the U.S. labor market.

Within the statistical framework used by the U.S. Bureau of Labor Statistics, workers who leave employment due to deportation are typically recorded as layoffs or discharges, because the employer initiates the separation once the worker can no longer legally remain on payroll. These departures, therefore, appear in the layoffs and discharges category even though they do not necessarily reflect the same economic forces that drive conventional layoffs during downturns.

Large numbers of such separations may also indirectly reduce hiring opportunities. When potential workers leave the country or otherwise exit the labor force, the number of individuals available to fill open positions tends to decline. In some industries—particularly agriculture, construction, and certain service sectors—this can lead employers to postpone expansion plans or reduce recruitment efforts because they cannot easily find suitable labor.

In short, low quit rates are the smoking gun behind the “low-hire, low-fire” hypothesis that we keep hearing about.

Source: U.S. Bureau of Labor Statistics (Monthly JOLTS Survey)

Summary and Concluding Thoughts

The U.S. economy employed roughly 132 million workers in 2001, compared with around 160 million today. As the workforce grows, the number of hires required to maintain a similar level of labor market dynamism also increases. Consequently, a similar number of hires can correspond to a lower labor market turnover rate, and that is vastly different from the common perception that no hiring or firing is taking place today.

The data show that millions of workers are hired and separated every month. The apparent slowdown in hiring is closely linked to the decline in U.S. quit rates. At the same time, the low layoff rates suggest that many firms are maintaining their existing workforce. Taken together, these patterns describe a labor market characterized less by inactivity than by caution. Workers appear more hesitant to leave their jobs, while employers are more inclined to retain existing staff than to expand aggressively. The result is a slower pace of job turnover relative to the size of the labor force, even though the underlying number of employment transitions remains extraordinarily large. Understanding this distinction is essential when interpreting labor market data. A “low-hire, low-fire” economy does not mean that hiring and firing have stopped. Rather, it means that the rate at which workers and employers change positions has slowed relative to the scale of the U.S. workforce.

Still, it is difficult to imagine that observing 10 million workers being hired, retiring, and laid off each month is consistent with the view that firms are not hiring or firing any workers!

The sudden escalation in tensions between the United States and Iran in early March 2026 has injected a new layer of uncertainty into global energy markets, and by extension, into sectors that rely heavily on diesel fuel. West Texas Intermediate (WTI) crude surged nearly 6 percent in a single trading session to about $71.00 per barrel after reports that Iran effectively closed the Strait of Hormuz (SOH), a maritime chokepoint through which roughly one-fifth of global oil supply flows. Brent crude briefly crossed $82 per barrel, and analysts warned that a prolonged disruption could push prices toward $100 per barrel. Although we want to provide our readers with arguments on both sides of this issue, our nonpartisan view is that oil prices will not be a major impediment, even if they rise to $100.00 per barrel. We believe this price threshold will not be sustainable, as prices should return to pre-conflict levels within a couple of months.

West Texas Intermediate Oil Prices

Source: Yahoo Finance

Still, fuel is not a marginal input cost in the moving industry; it is central. In the broader trucking and logistics sector, fuel typically represents 20 to 25 percent of total operating costs. For interstate household moves, which involve heavy loads and long distances, that share can rise toward 25 to 27 percent during periods of volatility. A single semi-trailer fill-up can cost as much as $1,500. When crude rises $5 to $10 per barrel, diesel prices at the pump often increase by 15 to 25 cents per gallon. With WTI climbing from roughly $67 to above $72 almost overnight, some companies can experience increases of 10 to 15 cents per gallon almost immediately. If crude were to move toward $85 or $95 in a persistent standoff, fuel’s share of revenue could approach 30 percent. In a more extreme scenario—such as a prolonged blockade of the SOH—fuel could account for more than 35 percent of operating costs, putting pressure on profit margins. In the interest of full disclosure, it should be noted that forecasting oil prices is a challenging exercise. The official 2026 forecast by the U.S. Energy Information Administration called for a 6% decline in oil prices. At the time of this writing, oil prices are up +22.9% year-to-date in 2026!

At first glance, companies appear insulated as they employ fuel surcharge mechanisms that pass a substantial portion of fuel cost volatility directly to customers. The surcharge is typically calculated as a percentage of the linehaul charge—the base cost determined by shipment weight and distance—and is tied to the U.S. Department of Energy’s weekly national diesel average. A common formula increases the surcharge by 1 percent for every 10-cent rise in diesel above a $2.50 baseline. At diesel prices between $3.80 and $4.10 per gallon, consistent with a $73 per barrel crude environment, interstate moves can carry surcharges in the 14 to 18 percent range. This design ensures that when fuel costs rise, revenue per shipment rises proportionally.

However, this pass-through system is not a perfect hedge. First, there is a timing mismatch. The Department of Energy index resets on Mondays. If oil spikes on a Tuesday, moving companies pay the higher pump price immediately, but cannot adjust the surcharge until the following week. In a fast-moving market, that lag can erode margins, particularly for smaller independent agents operating within cooperative networks. Second, surcharges are calculated on loaded, billable miles. They do not compensate for “deadhead” miles—when a truck is driven empty to its next assignment. Although AI-driven route optimization tools increasingly reduce empty runs, they do not eliminate them. At elevated diesel prices, uncompensated deadhead miles become materially more expensive.

Third, surcharge tables assume an average fuel efficiency, typically around 6.0 miles per gallon. The moving industry operates a highly heterogeneous fleet. Department of Transportation data and industry estimates suggest that roughly 35 percent of moving trucks are modern, aerodynamic models that achieve 7.2 to 8.5 MPG. About 25 percent cluster around the 6.0 to 7.1 MPG benchmark and are effectively breakeven under surcharge formulas. But approximately 40 percent—often older, pre-2017 trucks or heavy-duty configurations—achieve only 4.0 to 5.9 MPG. These operators are subject to what industry participants call the “efficiency penalty.” When diesel rises by $1.00 per gallon, a surcharge calibrated to 6.0 MPG compensates for six miles of travel per gallon, but a truck achieving 5.0 MPG consumes 20 percent more fuel than the model assumes. The shortfall comes directly out of the agent’s margin.

Source: U.S. Department of Transportation

Moving companies tend to operate older trucks than asset-based freight carriers. The reason is structural. A long-haul freight tractor may accumulate 120,000 miles annually, justifying replacement within five to seven years. A household goods truck, by contrast, may log closer to 50,000 miles per year because loading and unloading are labor-intensive and time-consuming. Lower annual mileage extends asset life, so trucks remain in service 15 years or more. The unintended consequence is that a larger share of the fleet operates below the fuel-efficiency benchmark embedded in surcharge models. In periods of elevated oil prices, this creates internal dispersion: modern fleets may benefit from the surcharge spread, while older fleets suffer margin compression.

Higher energy prices also interact with macroeconomic channels that indirectly influence relocation demand. On March 2, 2026, as oil surged, the U.S. 10-year Treasury yield rose by 7 basis points amid concerns that sustained energy inflation could feed broader price pressures. If oil remains elevated and inflation expectations drift higher, long-term yields could rise further. Mortgage rates, which are closely linked to the 10-year Treasury, would face upward pressure. For households contemplating a job-related move, even modest increases in mortgage rates can materially affect affordability. A higher monthly payment may discourage both home purchases and relocations. This is the demand-destruction channel: not only does transportation become more expensive due to fuel surcharges, but housing affordability deteriorates simultaneously.

Historically, oil price spikes tied to Middle East conflicts have followed a “spike and decay” pattern. The 1973 Arab oil embargo produced a structural shift, with prices quadrupling and never returning to prior levels. The 1979 Iranian Revolution doubled prices for several years. By contrast, the 1990 Persian Gulf War saw prices double briefly before receding within nine months as supply disruptions proved manageable. More recent events, such as the 2011 Libyan civil war, produced price increases of roughly 25 percent that persisted for a few years before the shale-driven collapse of 2014. In most modern episodes, absent permanent infrastructure damage, prices normalize within six to twelve months. For moving companies, this suggests planning for at least two quarters of elevated surcharges in a moderate scenario, with longer exposure if the conflict escalates.

Tapping the U.S. Strategic Petroleum Reserve

Policy responses may mitigate, but not eliminate, pressure. The President could authorize releases from the Strategic Petroleum Reserve (SPR). The SPR was tapped during the 1991 Gulf War, the 2011 Libyan disruption, and, most notably, in 2022, when 180 million barrels were released in response to the Russia-Ukraine conflict. Treasury analysis at the time estimated a reduction in gasoline prices of 17 to 42 cents per gallon. However, the SPR currently sits near multi-decade lows—approximately 351 million barrels—following prior drawdowns. Its capacity to suppress prices is therefore more limited than in past episodes. Moreover, the SPR releases crude oil, which must be refined; diesel markets can remain tight even when crude supply increases.

Regionally, impacts will diverge. Without the knowledge of the ongoing U.S.-Iran conflict, the Energy Information Administration projected average 2026 gasoline prices near $3.00 per gallon and diesel around $3.50 under baseline conditions. Yet states such as California, facing refinery closures and unique regulatory requirements, are likely to experience higher prices. Interstate carriers operating heavily in high-cost regions may see disproportionate effects, amplifying the financial strain on agents with dense West Coast exposure.

The strategic response for some companies may consist of multiple layers. AI-driven route optimization reduces unnecessary mileage and congestion delays. Fleet modernization programs aim to increase the share of trucks achieving 7.0 MPG or higher, thereby narrowing the efficiency penalty. Some operators explore alternative fuels or electric platforms, though heavy long-haul electrification remains technologically constrained.

Yet structural vulnerabilities remain. The surcharge mechanism shields companies from immediate collapse, but it shifts cost to consumers at precisely the moment when macroeconomic conditions may discourage discretionary mobility. Corporate relocation budgets could tighten if firms face their own cost pressures from higher energy inputs and interest rates. Individual households may delay moves, opt for smaller shipments, or negotiate aggressively on linehaul rates. In that environment, the thin margins of independent agents—especially those operating older equipment—are pushed to the limit.

Summary and Concluding Thoughts

Given our base case view that WTI will stabilize in the low $70s and then drop from those levels in 2026, we believe the industry will be able to absorb the latest geopolitical shock with limited long-term disruption. If, however, prices trend toward $100 or higher and remain at those high levels for an extended period, fuel could consume more than one-third of operating costs, surcharges could climb well above 20 percent of linehaul charges, and the combined effect of higher transportation and mortgage costs could materially suppress relocation volumes. In such a scenario, consolidation within the moving industry would likely accelerate, with capital-intensive, fuel-efficient operators gaining share at the expense of smaller, older fleets.

The Iran–U.S. conflict thus transmits through three channels to moving and logistics companies: direct fuel cost escalation, indirect macroeconomic tightening via interest rates, and potential demand destruction in housing and job mobility. While fuel surcharges provide a structured buffer, they are not airtight. Deadhead miles, efficiency dispersion, and index lags leave measurable exposure. Our view, however, is that any increases in oil prices, even if they rise to nosebleed levels, will be temporary. For this reason, we believe any price increases will be a transient spike that will be a manageable shock for the household goods transportation sector.

In a June 5, 2025, Substack article. I argued in Gold Rush 2.0: Why Are Global Central Banks Hoarding Gold Like It’s 1971? that the post-pandemic surge in official gold buying was not merely a reaction to inflation, but the early stage of a structural realignment in global reserve management. As we enter 2026, this trend has become more pronounced. What…

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