Yardeni Says Inflation, Fed Back in Play as Iran Crisis Returns

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(Bloomberg) — Market strategist Ed Yardeni said the rupture in the ceasefire between the US and Iran risks sparking a fresh acceleration in price growth, which in turn could compel the Federal Reserve to raise interest rates.

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“Inflation concerns are back in play and as a result of that, the Fed is back in play,” Yardeni said Wednesday on Bloomberg Television’s Surveillance. “Not only has the Fed pivoted to tightening, but they may actually have to tighten.”

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The comments by the president and founder of Yardeni Research followed President Donald Trump’s warning that the tentative ceasefire with Iran may be over, raising the prospect of an end to peace negotiations and a potential renewal of fighting. Trump commented after the US launched a fresh wave of strikes against the Islamic Republic and revoked a waiver that allowed the sale of Iranian oil. Crude spiked higher, global stocks fell and US Treasuries hit session lows.

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Brent crude, the global benchmark, had recently erased its wartime gains as tanker traffic through the Strait of Hormuz picked up. But on Wednesday, prices surged past $79 a barrel in intraday trading, the highest level in more than two weeks as Iran also said that the US attacks and the block on oil sales had rendered last month’s interim peace deal “ineffective.”

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“This is a geopolitical crisis that just won’t go away, won’t end,” Yardeni said. “We’re back to square one, in some ways, back to where we were in March.”

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Yardeni said even as the US labor market seems stable, “all bets could be off here depending on what happens with the Middle East. The consumer has been doing just great,” he said. But risks remain “if we get another spike in gasoline prices.”

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Fed policymakers have generally sought to look past energy prices as transitory. Still, that pressure has squeezed consumers and contributed to the consumer price index climbing to a three-year high in May. Average gasoline prices were below $3 a gallon before the US and Israel launched their strikes against Iran on Feb. 28. They peaked at more than $4.56 in May before falling almost 17% to $3.79 a gallon as of Monday, according to the American Automobile Association.

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Meanwhile, traders have been increasing bets the Fed will raise rates this year, with markets currently seeing more than one hike by year-end, according to data compiled by Bloomberg.

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“Now the Fed seems to be pretty much all aligned with the idea that price stability is much more important than the labor market,” Yardeni said.

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(This story was produced with the assistance of Bloomberg Automation.)

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