The Markets Are Balancing on a Knife's Edge
The calm in the markets has been unnerving.
You might think the world has been enjoying a season so tranquil that the stock, bond and currency markets have fallen asleep.
Yet the world has been anything but peaceful lately, whether in the United States, Ukraine or the Persian Gulf. And the Federal Reserve gave the markets another reason for concern on Wednesday when it held interest rates steady. Jerome H. Powell, the Fed chair, said that the economy faced the risks of both higher inflation and stagnating economic growth, but that the central bank needed more evidence before it could decide where the greatest dangers lay.
'Right now, it's a forecast in a foggy time,' he said. Even more than usual, the path ahead isn't clear. Still, there was barely any reaction in market prices. Nor has anything else seriously disrupted major markets.
That's noteworthy, when you consider the crises that are looming: the highest tariffs in decades; a contentious crackdown on immigration and a swelling budget deficit in the United States; and, in the Middle East, an escalating war between Israel and Iran that could sharply reduce global oil supplies.
This isn't to say all markets have been entirely placid. The price of oil has oscillated since Israel launched a barrage of air attacks on Iran last Friday, setting off a new, heightened stage of conflict between the two longtime adversaries. President Trump has warned Iran's supreme leader, Ayatollah Ali Khamenei, that the United States might intervene directly, saying, 'Our patience is wearing thin.' The start of a much bigger war, with the United States joining the Israeli effort to eliminate Iran as a potential nuclear threat, would undoubtedly wake the markets from their apparent slumber.
High Stakes
The economic risks in the Persian Gulf are enormous. If Iran were desperate enough, in addition to targeting U.S. forces in the region it could throttle the oil supplies that pass through the Strait of Hormuz. Shipping through the strait encompasses one quarter of 'total global seaborne oil trade,' according to the U.S. Energy Information Administration, and protecting that oil route has been a preoccupation of U.S. military planners since the days of the shah of Iran, who was deposed in 1979.
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