Israel’s attacks on Iran may keep Fed rate cuts on hold, just as inflation was looking better

• Surging oil prices in the wake of Israel’s large-scale airstrikes on Iran could reignite inflation, which has shown signs of cooling despite President Donald Trump’s tariffs. Israel has signaled its attacks will be sustained, raising the risk oil prices will remain high and drag inflation up too, preventing the Federal Reserve from lowering interest rates.

Israel’s large-scale attacks on Iran sent oil prices surging, and the prospect of a prolonged conflict that keeps crude higher could dash hopes for rate cuts from the Federal Reserve.

West Texas Intermediate and Brent crude both jumped about 6% Friday to a $72.11 and $73.46 per barrel, respectively. That comes after months of subdued prices had helped keep inflation in check, despite fears President Donald Trump’s tariffs would add upward pressure.

Lower-than-expected readings earlier this week on consumer and producer prices had raised hopes the Federal Reserve could have more leeway to lower interest rates later this year.

But those hopes suddenly dimmed after Israel launched airstrikes across Iran early Friday, targeting its nuclear weapons facilities and top military leadership.

The 10-year Treasury yield jumped 6.9 basis points on Friday to $4.426, reversing a dip in the immediate aftermath of the attacks, as rate-cut optimism cooled.

Prime Minister Benjamin Netanyahu has signaled Israel’s offensive will be sustained for as long as necessary to eliminate Iran’s nuclear threat.

Iran has already retaliated by launching drone attacks and canceling another round of talks with U.S. officials over easing sanctions on Tehran in exchange for concessions on Iran’s nuclear program.

That sets up the region for a potentially extended conflict, maintaining pressure on oil prices and inflation. While Israel hasn’t yet targeted Iran’s oil production and export facilities, such an attack or Iran blocking the Strait of Hormuz, a key chokepoint in the global oil trade, could send crude by $20 per barrel or more, analysts estimated.

According to Capital Economics, a surge to $80-$100 a barrel could add up to 1.0 percentage point to inflation in developed markets.

“We suspect such a spike in prices would result in more OPEC+ production coming online though, thereby limiting the length of the inflation shock,” Capital Economics said. “But any rise in energy inflation would be another reason for central banks to proceed cautiously with cutting interest rates, and for the Fed to remain on the sidelines for now.”

With the risk of a recession easing as Trump has backtracked on his most aggressive tariff rates, any Fed rate cuts would have to come from continued cooling in inflation.

After the latest inflation data, Trump continued to harangue Fed Chairman Jerome Powell about lowering rates, ahead of the Federal Open Market Committee’s meeting next week.

Policymakers are expected to keep rates on hold again amid concerns tariffs may have a bigger impact on prices over the summer, when companies run out of pre-tariff inventory and can no longer eat the cost of higher duties.

This story was originally featured on Fortune.com