Oil prices briefly exceeded $110 yesterday following attacks on the world's largest liquefied natural gas facility and other energy assets, signaling heightened geopolitical risk. The Federal Reserve's stance on inflation became the central focus, particularly after Iran's armed forces declared the start of 'a new stage of war'. Chair Jay Powell addressed the core question of whether the Fed would 'look through' energy-driven inflation, stating they would if long-term inflation expectations remain anchored.

However, Powell clarified that this does not imply imminent rate cuts, as goods inflation has not declined as anticipated. The Fed's dot plot projections show a significant shift, with no committee members now expecting a rate hike in 2026, and more dovish members reducing their projected cuts. This compression reflects deepening uncertainty about the impact of the Iran conflict on inflation and the economy.

The market reaction has been volatile, with leadership flipping since the war began. While most asset classes pulled back, resilient sectors like information technology and consumer discretionary outperformed, contrasting sharply with the 2022 Russia-Ukraine conflict where tech led the downturn. Experts suggest the current environment offers a more balanced perspective on US tech, with longer-term inflation expectations showing less sensitivity to oil price shocks than in 2022.

The outcome hinges critically on whether the conflict resolves soon.