The Economic Impact Of The Israel-Iran War

On Friday, June 13 (remember the Jewish day begins at sundown), Israel attacked Iran. In an audacious move, the IDF managed to hit selected nuclear enrichment facilities, as well as assassinate several Iranian military leaders and atomic scientists.

The back-and-forth volley of ballistic and hypersonic missiles, as well as drones and fighter jets, continues, with both sides indicating that this will be a long war lasting many days and perhaps weeks.

Some of the financial markets reacted predictably, while others presented a surprise.

Oil was the most predictable of all commodities, rising in price by 5% on Friday. Investors can expect this price hike to continue for the foreseeable future as Iran effectively controls the Straits of Hormuz, through which a third of the world’s natural gas and a quarter of its oil passes daily. Iran can be expected to shut off petroleum shipments to the allies of Israel, which almost certainly will include the United States.

Look for prices at the gas pump to rise. The last time this happened, we saw an immediate spike in inflation. This will present a significant challenge to the Federal Reserve, which has vowed to fight rising prices. The FOMC, the committee responsible for setting short-term interest rates, is scheduled to meet next on July 29–30. Almost no one expects the Fed to make a move at this meeting.

The next meeting will be held on September 16–17. Many analysts expected the Fed to lower interest rates by at least 25 basis points at this meeting. However, the probable rising inflation, driven by higher gas prices, will prevent the Fed from easing its current monetary stance. Look for no change in Fed policy for at least the next two quarters.

Perhaps the most curious response in the Financial Markets was that of the US Treasuries. In a reaction that investors have come to expect, it is understood that bond prices rise during periods of economic hardship. And few times could be more problematic than a major war in the Middle East. Yet, surprisingly, US Government bonds across all maturities declined. While the decline was only fractional, it reveals the difficult position the Federal Government will find itself in. It will come as no surprise that the US is facing a financial crisis; current Government debt is rapidly closing in on $37 trillion.

At least part of this debt is attributable to the roughly $1 trillion defense budget. Buried within that budget, and perhaps others like the State Department is the ongoing support for the War in Ukraine. As the War has continued, the United States has taken on the lion’s share of financial support for the country, including supporting various governmental operations in Ukraine. This is not to argue that other countries are not supporting Ukraine; rather, it is to suggest that American support is proving to be a burden to our already indebted government.

Well, Israel presents another burden, likely to be even more intense. Because, unlike Ukraine, Israel has become almost entirely dependent upon US support, both military and financial. With one port already effectively closed by Ansar Allah and another one threatened, Israel’s economy appears to be grinding to a halt. No doubt, the American taxpayer will be expected to make up any shortfall. As this War continues, look for US Government Debt to expand, not fall — that’s the reason that Treasury Bonds are acting strangely.

Finally, the Trump Administration has opened up a credibility problem at a time when it is most needed. A brief recap of the events leading up to the Israeli attack goes like this.

On June 12, Trump emphasized, not for the first time, that his Administration remains committed to negotiations:

“We remain committed to a Diplomatic Resolution to the Iran Nuclear Issue!” Trump wrote on his Truth Social platform.

“My entire Administration has been directed to negotiate with Iran. They could be a Great Country, but they first must completely give up hopes of obtaining a Nuclear Weapon,” he added.

https://www.reuters.com/world/middle-east/un-nuclear-watchdog-says-iran-breach-obligations-iran-announces-counter-measures-2025-06-12/

With the sixth round of negotiations scheduled for Sunday, June 15, the Iranians naturally expected this comment to show America’s commitment to the diplomatic solution. Regrettably, that was not the case. Instead, it now appears that Trump’s remarks were meant to deceive, to lull Iran into believing that, at least for the time being, negotiations and not War would be forthcoming.

As the world now knows, it was on Friday that Israel commenced its devastating attack, decapitating much of Iran’s military leadership and destroying at least one nuclear facility.

Immediately following the attacks, President Trump would tell Reuters:

“We knew everything, and I tried to save Iran humiliation and death. I tried to save them very hard because I would have loved to have seen a deal worked out,” Trump said.

https://www.reuters.com/world/middle-east/trump-tells-reuters-its-unclear-if-iran-still-has-nuclear-program-2025-06-13/

It was a claim that he would make with other news services. So the claim that he was “committed” to negotiations was a ruse, a very effective deception designed to obscure the coming onslaught of Israeli jets, missiles, and drones.

The result of this strategy, while tactically successful, has been immediately condemned by many in the international community. Most specifically, China, Russia, India, and other leaders in BRICS, the very countries that Trump now needs to endorse the Tariffs. We can expect those negotiations to become highly problematic in the days and weeks ahead.

While it is much too early to make any definitive statement on the military results of the conflict so far, the economic projections of the War look pretty straightforward.

We should expect a resumption in inflation driven principally by the price of petroleum, particularly gasoline. This trend began with oil futures on Friday and should continue.

Second, we should expect the financial burden on the US to increase as this new conflict continues. Look for efforts to rein in the national debt to have significant headwinds.

And finally, we should expect great difficulty in Tariff negotiations, especially with those countries that align with Iran.