Geopolitical tensions drive oil surge and pressure U.S. economy

In the most recent episode of the podcast Mercado Sobre Ruedas, financial markets journalist Julián Yosovitch offers an analysis and reflection on the current state of geopolitics, its impact on the U.S. economy, and the pressure facing the Federal Reserve (Fed) amid the potential transition in Jerome Powell’s administration.

Below, we review Yosovitch’s main insights.

Middle East conflict escalates

The conflict in the Middle East continues to escalate, raising growing concerns in international markets. Iran’s new Supreme Leader, Mohammad Khamenei, recently declared that the Strait of Hormuz will remain closed—a measure aimed at pressuring the United States that directly affects global oil trade, as about 20% of the world’s crude oil passes through this route.

Khamenei also demanded the immediate closure of all U.S. military bases in the region, warning that they would be attacked, according to televised statements translated by Reuters. These were his first public words since his appointment on March 9, following the assassination of his father, Eshatollah Ali Khamenei, which was attributed to combined Israeli and U.S. attacks in late February.

Markets reacted immediately to these developments: oil prices surged, exceeding $120 per barrel at times before stabilizing around $100, representing an increase of more than 60% in the past month. This escalation directly impacts global inflation, as oil is a key input for transportation, energy, and manufacturing. Analysts warn that crude could reach $200 if the situation persists, creating an inflationary pressure scenario that would affect both businesses and consumers.

Signs of weakness in the U.S. economy

On the other hand, U.S. economic data show mixed signals. February inflation remained at moderate levels, with a 0.3% monthly increase and 2.4% year-on-year, showing no effects yet from the recent rise in oil prices. However, the labor market delivered a negative surprise, with 92,000 jobs lost in February versus the 50,000 expected, raising fears of a possible economic slowdown. This is because prolonged weakness in employment could reduce consumer confidence and affect economic activity, given that consumption represents two-thirds of U.S. GDP.

The combination of inflationary risks and labor slowdown puts the Federal Reserve in a complex scenario: raising rates to control inflation could deepen a recession, while cutting them to stimulate employment could intensify inflationary pressures, creating a potential stagflation risk. Investors are already adjusting their expectations, postponing possible rate cuts and anticipating that the Fed will prioritize price stability over labor market stimulus.

The next Federal Reserve Chair, Kevin Walsh, will have to navigate this delicate balance, with an economy marked by volatility, geopolitical conflicts, and uncertainty over inflation trends.

Market impact

On Wall Street, the sectors benefiting most from rising oil prices have been energy and gas, with gains of up to 33% year-to-date, while oil-intensive sectors, such as airlines and manufacturing, have experienced significant declines.

Major U.S. indices reflect this tension: the S&P 500 is down 1.9% year-to-date, the Dow Jones over 2%, and the tech-heavy NASDAQ has fallen 3.8%, showing the high volatility caused by the Middle East war and uncertain economic expectations.