A large billboard bearing the slogan Great Victory in both Persian and English is seen displayed at Rah Ahen Square in Tehran, Iran
Markets are starting the new week with an uncomfortable combination. Following another military escalation between the United States and Iran, Brent crude climbed back above $90 a barrel on Monday. At the same time, Federal Reserve Chair Kevin Warsh made clear at the central bankers’ gathering in Jackson Hole that further rate hikes remain possible. For investors, the two developments are more closely linked than they may initially appear: the longer high energy prices keep inflation elevated, the less room the Fed has to ease monetary policy.
The geopolitical risk premium is back
Over the weekend, the United States said it had struck two Iranian missile positions on Larak Island in the Strait of Hormuz. Iran responded with missile attacks on US military bases in Jordan. It was the first direct US strike on Iranian territory since late July.
The oil market reacted immediately. Brent crude rose by around 2.7 percent at one point on Monday to above $90 a barrel, while US crude posted a similar gain.
What matters less here is Iran’s immediate level of oil production than the situation in the Strait of Hormuz. Before the conflict began, more than 20 million barrels of oil and petroleum products passed through the waterway each day — roughly one fifth of global consumption. In the second quarter of 2026, according to calculations by the US Energy Information Administration, those flows temporarily collapsed to an average of just 4.9 million barrels a day as a result of the war.
More recently, shipping volumes had recovered significantly, removing part of the geopolitical risk premium from oil prices. The latest exchange of strikes is now reminding markets just how fragile that normalization remains. According to Reuters, flows through the region had recently recovered to around 15 to 16 million barrels a day.
Warsh does not want markets to pin him down
At the same time, Fed Chair Kevin Warsh struck a markedly more restrictive tone in Jackson Hole.
He stopped short of making a specific announcement ahead of the next meeting on September 16. His message was nevertheless clear: as long as underlying inflation does not return decisively and at a sufficient pace toward the 2 percent target, the Federal Reserve still has “work to do.”
Warsh said inflation remained too high and questioned whether current financial conditions were restrictive enough. He also once again pushed back against a central bank policy that gives markets a precise interest-rate path well in advance. Decisions, he argued, should depend more heavily on incoming data.
Investors still interpreted the speech as a clear signal.
The implied probability of a September rate hike rose to around 58 to 60 percent on Monday. Following Warsh’s remarks, Barclays changed its forecast and now expects a 25-basis-point increase in both September and December. Previously, the bank had expected the Fed to leave rates unchanged through the end of the year.
Oil makes Warsh’s job harder
That brings together two developments that can interact unfavorably for markets.
Higher oil prices initially raise the cost of fuel, transport and a wide range of production processes. If they remain elevated for longer, those additional costs can feed through supply chains into broader prices. Germany is already feeling the effect: energy import prices in July were 26.4 percent higher than a year earlier. Destatis explicitly attributed the sharp increase in part to the consequences of the Iran war.
For the Fed, however, a higher oil price does not automatically mean higher interest rates. Central banks do not normally respond to every short-term energy shock. The problem becomes more serious when higher energy costs spill over persistently into other prices or begin to affect inflation expectations.
And that is precisely the risk Warsh highlighted in Jackson Hole. Inflation expectations, he said, remain well anchored for now, but must be monitored closely.
The renewed rise in oil prices therefore comes at a particularly awkward moment.
Equities face higher costs and higher yields at the same time
That combination was already visible in markets on Monday.
The DAX was down around 0.7 percent in morning trading, while the European STOXX 600 slipped slightly. At the same time, yields on two-year German government bonds reached their highest level since July 2024. Energy companies, by contrast, were among the winners as oil prices rose.
Highly valued technology and growth stocks are often particularly sensitive to rising yields. Their expected earnings lie further in the future and are therefore discounted at a higher rate when interest rates rise. In addition, the enormous investment programs in data centers, chips and AI infrastructure become more expensive as financing costs increase.
That creates a market setup investors know well from recent years: a supply shock pushes prices higher while tighter monetary policy can simultaneously weigh on growth.
That does not necessarily mean another inflation wave is inevitable. Despite the latest jump, oil remains well below its July peak of around $105 a barrel, and weaker global demand could limit further increases. The EIA also expects subdued oil demand to cushion part of the impact from disruptions in the Strait of Hormuz.
This week will show whether nervousness turns into a new trend
Investor attention is therefore shifting toward the latest US economic data.
Fresh labor-market figures are due later this week, followed by inflation data. They are likely to play a decisive role in determining whether the rate increase currently priced in for September moves closer to becoming reality. Warsh has deliberately kept his options open.
At the same time, the oil market remains dependent on how the conflict develops. Any renewed increase in shipping risks in the Strait of Hormuz could quickly widen the price premium, while signs of de-escalation could remove it just as fast.
Markets are therefore having to price two uncertainties at once.
What happens in the Strait of Hormuz will help determine where oil prices go. And oil prices will help determine how difficult Warsh’s fight against inflation becomes.
That means the Iran conflict is no longer merely a geopolitical risk for markets.
It has once again become an interest-rate risk.
Stefanie S. Klief
