The question resonates after President Trump publicly mused about what could be the most momentous decision of his presidency. Bound up with that decision are high-stakes repercussions that could reverberate through the US economy and around the world.
“I may do it, I may not do it,” he told reporters at the White House on Wednesday.
The decision is whether to join Israel’s ongoing attacks on Iran that are targeting Tehran’s nuclear fuel capabilities in an effort to prevent the country from developing nuclear weapons. Despite the narrow focus, the strikes are spreading, as both nations widen the scope of missile attacks. On Thursday, Iran struck an Israeli hospital, prompting Israel to warn that it will “increase the intensity of attacks,” according to the defense minister.
The US may be on the cusp of becoming an active participant in the conflict. If so, the decision will expand and deepen the uncertainty for the Middle East and the US on the geopolitical and economic fronts.
Iran to date has proven to be no match for Israel, and so America’s involvement would almost surely be decisive in military terms. The bigger risk is what comes after the conflict? The first question: Will Iran’s regime fall? If so, what takes its place?
The lessons of Afghanistan and Iraq loom large as the US considers entering another Middle East conflict. For now, much is unclear about how US involvement might unfold. The consensus at the moment seems to be that Trump would limit assistance to Israel by dropping “bunker buster” bombs on Iran’s underground nuclear sites.
The uncertainty is whether that would suffice as a means to declare victory and prevent Iran from rebuilding its nuclear capabilities. Alternatively, is regime change now the priority, as some commentators suggest? In that case, air power alone may not be enough.
Adm. William F. Fallon, who previously oversaw American military operations in the Middle East as head of US Central Command, worries that an American strike on Iran could open a Pandora’s box of risk. “What’s the plan?” he wonders. “What’s the strategy? What’s the desired end state? Iran not having a nuclear weapon is something few people would disagree with. But what is the relationship we would have with Iran in the bigger Middle East? We’re just knee-jerking.”
The high-stakes decision for the US comes at a precarious point in economic terms. The Federal Reserve yesterday published new economic projections that revised growth down and inflation up. “The summary forecasts that were published today imply that the FOMC sees a bit more stagflation than it did in March,” said Wells Fargo (NYSE:WFC) Chief Economist Jay Bryson.
Tariffs are still very much a part of the risk factors lurking for the near term. Adding a US dimension to the Iran attack to the mix will complicate and perhaps worsen the macro analysis by more than a trivial degree.
“We haven’t been through a situation like this, and I think we have to be humble about our ability to forecast it,” Federal Reserve Chair Jerome Powell said yesterday.
The immediate macro risk is a further spiking of oil prices. If Iran feels threatened on a deeper level, it could lash out and close, or attempt to close, the Strait of Hormuz — a key route for global oil and liquefied natural gas shipments.
The price of crude oil is a useful benchmark at the moment for gauging perceptions of Iran-related risk. The US benchmark for oil closed on Wednesday at $74..87 a barrel, the highest since January.
If energy costs increase further, the shift will raise headline inflation. In turn, that would increase stagflation risk, with possible ramifications for monetary policy.
The good news is that the US economy, despite tariff risk, continues to show a fair amount of resiliency. Inflation remains moderate, based on the latest numbers, and the nowcast for the upcoming second-quarter GDP report points to a solid rebound after the slight contraction in Q1.
The question is whether this is the calm before the storm?