The financial press is currently obsessed with a singular, lazy narrative: conflict in the Middle East creates "uncertainty," and uncertainty forced central banks to sit on their hands. They argue that because a regional war might dent consumer confidence or disrupt supply chains, the Federal Reserve and its global peers must pause, wait, and hope for the best.
This logic is not just flawed; it is dangerous. It mistakes a symptom for the disease.
If the threat of a widening conflict in Iran is real, holding interest rates steady is the coward’s gambit. In a world of escalating geopolitical friction, "wait and see" is a recipe for a stagflationary trap that will make the 1970s look like a minor market correction. We don't need a pause. We need the structural integrity that only restrictive monetary policy can provide when the world starts burning.
The Myth of the Geopolitical Pause
The consensus view suggests that central banks should act as a shock absorber. When a drone hits a refinery or a strait is closed to shipping, the theory goes that the "shocks" are outside the control of domestic policy. Therefore, the central bank should ignore the spike in energy prices and focus on the potential "slowdown" in economic activity.
I have watched traders lose billions betting on this exact brand of passivity.
Geopolitical instability is not a temporary glitch in the system; it is a permanent feature of the new decade. When you hold rates steady in the face of rising energy costs, you aren't "supporting the economy." You are subsidizing the next leg of the inflation trade. You are telling every business and consumer that even if oil hits $120, the central bank will keep liquidity cheap enough for them to keep bidding up prices.
When supply shocks hit, the $AS$ (aggregate supply) curve shifts left. If the central bank maintains an accommodative or neutral stance, they effectively try to keep $AD$ (aggregate demand) high. The result isn't "stability." The result is a vertical climb in the price level $P$.
Inflation is Not a "Supply Side Only" Problem
You will hear talking heads scream that "The Fed can’t print oil." It’s a clever line. It’s also wrong.
While the Fed cannot drill for more crude, it absolutely controls the demand for it. High interest rates are the only mechanism we have to crush the speculative froth that drives energy futures higher during a war scare. When money is cheap, speculators use low-interest margins to bet on $150 oil. When the cost of carry goes up, that trade becomes expensive.
By refusing to hike—or even by signaling a pause—central banks are providing the cheap fuel for the very fire they claim to be worried about. If you want to protect the economy from the fallout of an Iranian conflict, you don't do it by keeping the taps open. You do it by ensuring the currency remains a store of value.
The Credibility Gap
I’ve spent twenty years in the rooms where these decisions are dissected. The biggest threat to the global economy isn't a missile; it’s a loss of faith in the central bank’s mandate.
If the public perceives that the Fed or the ECB will find any excuse—a war, an election, a bad manufacturing report—to avoid doing the hard work of price stability, then inflation expectations become unanchored. Once that happens, you aren't dealing with a "supply chain issue." You are dealing with a psychological shift where everyone raises prices because they expect everyone else to do the same.
The "uncertainty" over Iran should be a reason to strengthen the dollar, not a reason to let it erode. A strong, high-yielding currency is a safe haven. A currency backed by a central bank that is too scared to move is a liability.
Why the "Soft Landing" is a Fantasy
The competitor article likely mentions the "Goldilocks" scenario—the idea that we can navigate this tension without a recession.
Let’s be blunt: The soft landing is a myth sold to retail investors to keep them in the market. You cannot have a decade of zero-percent interest rates, followed by a global pandemic, followed by a massive fiscal blowout, and then expect to fix it all without some structural pain.
Adding a Middle Eastern war to that mix doesn't mean we should "pause." it means the margin for error has disappeared. We are currently operating with a debt-to-GDP ratio that makes the post-WWII era look frugal.
$$DebtRatio = \frac{Total Public Debt}{Gross Domestic Product}$$
When the numerator is exploding and the denominator is threatened by war-induced slowdowns, the only way to prevent a total sovereign debt crisis is to maintain the attractiveness of the debt to international buyers. That requires yield. Real yield. Not the "wait and see" crumbs currently offered.
The Brutal Truth About Energy Independence
The crowd loves to talk about how the US is now a net exporter of energy, suggesting we are insulated from Iran. This is a fundamental misunderstanding of global commodity markets.
Oil is a fungible, global pool. If the Strait of Hormuz is compromised, the price of a barrel in West Texas doesn't stay low just because the oil was pumped in the Permian Basin. It follows the global Brent price.
The only way to insulate a domestic economy from global energy volatility is to reduce the velocity of money. You make it harder for that high energy cost to bleed into the "core" inflation of services and wages. You do that by tightening the screws.
If we hold rates here, we are essentially gambling that the conflict won't escalate. If it does, we will be forced to hike 100 basis points at a time in the middle of a crisis—a move that would actually cause the "black swan" event everyone is trying to avoid.
Stop Asking if Rates Will Go Down
The most common question I get is "When will they pivot?"
The premise of the question is flawed. It assumes that the low-rate environment of 2010–2020 was "normal." It wasn't. It was a historical anomaly fueled by a unique set of circumstances: a tech boom, a globalizing China, and a lack of geopolitical friction.
None of those things exist today.
- China is no longer exporting deflation; they are exporting overcapacity and geopolitical tension.
- Supply chains are moving from "just-in-time" to "just-in-case," which is inherently inflationary.
- Energy is being used as a weapon of war.
In this environment, the neutral rate—the rate that neither stimulates nor restricts the economy—is much higher than the 2% the "experts" are clinging to.
The Hard Choice
Central banks have two options.
- The Populist Path: Hold rates steady to "support" the market through the Iran crisis. Watch as energy prices spike, inflation becomes structural, and the middle class is gutted by a cost-of-living crisis that lasts a decade.
- The Institutional Path: Recognize that war risk demands a more restrictive stance. Hike now to preempt the inflationary surge. It will hurt. The stock market will bleed. Some over-leveraged zombies will go bust.
I’ll take the second option every time. It’s the only one that leaves us with a functioning economy five years from now.
The "uncertainty" in the Middle East isn't a green light for central bank passivity. It is a siren. If the people at the top are too deaf to hear it, you need to prepare your own balance sheet for the stagflation they are about to invite.
Stop waiting for a pause. Start preparing for a reality where money finally has a cost again.
