The Federal Reserve and War in Iran: Why It Matters to Your Money

If you’ve ever wondered why mortgage rates suddenly rise, why your savings account starts earning more (or less), or why the stock market reacts sharply to a single announcement, there’s a good chance it all traces back to one institution: the Federal Reserve.

Since President Trump began his second term, investors have heard him routinely berating Fed Reserve Chairman Jerome Powell, pushing him to cut interest rates further and faster. The Fed has responded by following their dual mandate of stabilizing inflation and employment, and their responsibility to remain apolitical. However, as inflation continued to settle in the second half of 2025 and into 2026, the Fed and White House were able to follow parallel paths.

Then, the U.S. attacked Iran for the second time in as many years. As the current war in the Middle East drags into its second month, with no off-ramp in sight, the Fed is faced with an entirely new economic climate. Crude oil is up 56% year-to-date, as Iran has effectively halted flows through the Strait of Hormuz, sending the cost of energy soaring across the globe.

The latest inflation figures show the CPI (Consumer Price Index) at 2.4% in February, very close to the Fed’s target rate of 2%. While energy costs can be erratic, and typically do not influence inflation data for sustained periods of time, they can have an immediate impact, and that will likely be the case for upcoming CPI readings. In other words, investors who foresaw rate cuts coming soon in 2026, may be wondering if they’ll happen at all this year, or even worse, if there could be rate hikes.

How the Fed Controls the Economy

The Federal Reserve, often called “the Fed,” is the central bank of the United States and is responsible for managing the nation’s monetary policy. Its role is to control the supply and cost of money in the economy. By doing so, they can keep inflation stable—targeting about 2% annually—and promote maximum employment. These goals don’t always align, which is why the Fed is constantly adjusting its approach based on economic conditions.

The Fed’s primary tool is interest rates—specifically the federal funds rate, which is the rate banks charge each other for overnight loans. This directly influences nearly every interest rate consumers encounter, from mortgages and auto loans to credit cards and savings accounts.
These decisions are made during meetings of the Federal Open Market Committee.

When the Fed raises rates, borrowing becomes more expensive. This slows spending and investment, helping to bring inflation under control. When the Fed lowers rates, borrowing becomes cheaper, encouraging economic activity and growth.

How It Affects Everyday Life

When the Fed raises rates, the trickle effect typically causes higher costs on mortgages, credit cards, and all types of new loans. These higher rates often create pressure on the stock market, as tighter financial conditions reduce liquidity and slow corporate growth. Investors often say, “Don’t fight the Fed”, for this exact reason. The silver lining is for conservative savers as savings accounts, CDs, and other fixed income investments begin to offer better yields.

When interest rates fall, the opposite happens. Borrowing becomes cheaper, refinancing opportunities improve, and businesses and consumers are more likely to spend. This often supports stock market growth. The tradeoff is that savings accounts and bonds tend to offer lower returns, which can push even more investors toward higher-risk assets. Most of the economy appreciates lower interest rates as it traditionally boosts the stock market and makes capital purchases like buying a home or a new car much more attainable.

How to Adjust to Fed Policy

When interest rates are high, it’s generally wise to be cautious with new debt, especially variable-rate borrowing. This is also a time to take advantage of higher guaranteed returns by locking in yields through CDs, U.S. Treasuries, or annuities. Market volatility can increase during these periods, so maintaining flexibility and discipline is key.

When rates are low, opportunities shift. It may be a good time to refinance existing debt or lock in long-term borrowing at favorable rates. Lower rates also tend to support stock market growth, making equities more attractive, though it’s important to remain mindful of risk as investors often stretch for returns in these environments.

The Federal Reserve is one of the most powerful forces shaping the economy. By influencing interest rates, it affects how much you pay to borrow, how much you earn on savings, and how your investments perform. Understanding the direction of interest rates can help investors make better financial decisions, pivot when necessary, and stay ahead of major economic shifts.

The war in Iran is an example of how domestic issues could be going as planned, but geopolitical shocks can put the Fed in an entirely new position. It is highly unlikely the Fed would ever cut rates amid volatility and rising energy costs, often preferring a wait-and-see approach for clearer data. When the Fed cuts rates in times of volatility, it is often in the case of an emergency, such as the Great Recession in 2008 or the COVID-19 pandemic in 2020.

Investors, and most of the world, hopes the war is resolved soon, but if it’s not, the Fed will take course in a new normal, possibly keeping rates higher for longer.

This article is intended for the general public and for informational purposes only. This should not be considered investment advice. Readers should consult their own financial professionals, legal, and tax advisors to discuss their specific situation.

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(Featured image by Joshua Woroniecki via Unsplash)

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