Iran war threatens Trump's affordability push as rising energy prices complicate Fed rate cuts

The war with Iran is quickly becoming an economic problem for the United States — and a policy dilemma for the Federal Reserve

The war with Iran is quickly becoming an economic problem for the United States — and a policy dilemma for the Federal Reserve.

Rising oil prices, shipping disruptions in the Middle East and fresh signs of weakness in the U.S. labor market are creating a complicated backdrop just as inflation had begun to show some signs of improvement. For policymakers, the risk is a familiar but unwelcome scenario: higher prices paired with slowing growth — a dynamic known as “stagflation” — that could make it harder for the Fed to cut interest rates and ease pressure on American consumers.

Gas prices on Friday hit their highest level since September 2024, according to AAA, with the national average reaching $3.32 per gallon. Meanwhile, U.S. crude oil logged its biggest weekly gain on record in data going back to 1983, a sign that gas prices could continue rising in the coming days and weeks.

This comes as the Federal Reserve is already grappling with signs of a weakening labor market. New data from the Bureau of Labor Statistics released Friday showed the U.S. economy lost 92,000 jobs last month, while revisions to December and January revealed 69,000 fewer jobs than originally estimated.

Typically, signs of a softening labor market would push the Federal Reserve to consider cutting interest rates to achieve maximum, sustained employment — one half of the central bank’s dual mandate, which also includes maintaining stable prices and keeping inflation near its 2% target.