Trump's Iran war threatens to blow up Fed's inflation fight: report

President Donald Trump's move to invade Iran is already having knock-on effects that are setting back his domestic policy goals — one of those being pressuring the Federal Reserve into lowering interest rates.

According to The New York Times on Tuesday, "The Federal Reserve was already struggling to get inflation back to its 2 percent target before President Trump opted for an all-out confrontation with Iran. Now, elevated energy costs, if sustained, risk delaying that progress further. That is entangling the central bank in yet another challenging debate about how to adjust interest rates at a time when the labor market looks increasingly fragile."

Energy prices have spiked largely over fears about the Strait of Hormuz, a critical sea lane between the Persian Gulf and the global ocean that carries around one-fifth of the world's oil supply. The strait forms part of Iran's southern coast, and experts have long feared a war between Iran and Western powers could shut down this waterway, catastrophically disrupting world oil supplies.

As a result, said the report, "investors now expect the Fed to delay its resumption of rate cuts by at least one meeting, with most now forecasting a move in September instead of July, as was the case before the conflict began."

Interest rate reductions make the cost of borrowing cheaper and lead to more spending, which can reduce unemployment in the short term; however, holding interest rates too low for too long can increase inflation, particularly when there is an outside pressure already driving up prices, like an energy crisis, which is why the Fed has held rates higher in recent years.

Trump has spent much of the last year demanding the Fed cut interest rates faster, sometimes accusing them of a plot to deliberately slow down the economy to make him look bad, and he and his top enforcers have even pushed criminal investigations into the Fed and Chair Jerome Powell, which observers have characterized as political retaliation. This move was so controversial that even a Republican senator has threatened to block Trump's Fed appointees until this matter is resolved.