Weekly Economic Update: June 24, 2025

All eyes on the Middle East

Markets were focused on the conflict between Israel and Iran all last week, with the China trade deal, the Federal Reserve meeting and the G7 gathering all taking a backseat. Last week’s Israeli strikes against Iran were surgical, with Israel targeting nuclear production facilities, missile manufacturing and launch sites.

After saying the U.S. would evaluate the situation for two weeks, over the weekend, the U.S. struck three nuclear sites in central Iran with 14 massive ordnance penetrator (MOP) bombs via B-2 stealth bombers and 30 Tomahawk missiles launched from a nuclear sub in the region.¹ This is a fast-moving situation, and we encourage everyone to stay informed about what’s happening.

Without knowing how all this plays out, one area of concern is the impact on oil prices. One-fifth of the world’s oil supply moves through and around the Strait of Hormuz, strategically located between the northeastern tip of the Arabian Peninsula and the southern coast of Iran.² Iran’s parliament has voted to block the strait, and if they are successful, we will have a major global problem.³

Given all the assets we have in the area via naval and air power, plus our Gulf State allies (who have a very strong vested interest in keeping the strait open), it doesn’t appear that Iran can do much.⁴ That said, the markets will likely be volatile this week. World oil prices will be affected, but all global risk assets could take the conflict hard. Our advice is to stay aware, stay patient and stick to your plan. Don’t give in to emotion, which is running high right now. The situation could be resolved rather quickly, barring what we know right now. Reacting to market hysteria would be a mistake, one which would take a long time to recover from.

Fed stays steady, signals two cuts later this year

The Fed concluded its June meeting with no rate cut, as expected.⁵ They also left the door open for rate cuts in the second half of the year, which will be here in less than two weeks.

At the meeting, the Fed signaled we should expect two rate cuts by year-end. The talk was that we were only one vote away from only one cut this year, which is headed in the wrong direction. The Fed decided to hold rates steady amid projections of slower economic growth, higher unemployment and higher inflation. And while the Fed may have signed two rate cuts are still their base case for the remainder of 2025, the timing of those cuts remains up in the air.

We don’t disagree with the projections for a slowing economy and higher unemployment. But we do disagree with the third point, inflation, because that seems to be dominating the other two projections. Right now, Fed Chair Jerome Powell is hanging his hat on the possibility that tariffs will be inflationary in the second half of 2025.⁶ So far, they haven’t been; yes, people will say tariffs have been delayed and postponed, so we haven’t felt their full impact yet.

There are several arguments against that logic. The first is, have you seen gas prices when the price of oil spikes? They literally go up within hours of the price increase. Why wouldn’t that happen with tariff announcements? Second, tariffs on goods become inflationary when you have more money in the system. If you have a limited amount of money and spend a higher amount on tariffed goods, you spend less on other things and the prices of those items will logically come down. That’s just basic economics.

Finally, there is always the possibility that a trade deal is reached. Isn’t that the objective? The worst fears of the highest tariff levels being implemented will not come to pass, at least in our view. It seems like Powell is being obstinate because of his feud with President Donald Trump. Powell has no way of knowing what the tariffs’ impact will be; he only has theories, but so does everyone else.

If you follow the logic above, there are ample reasons to believe that tariffs will not be anywhere as harsh as first thought, nor will they be as inflationary as Powell thinks. What is a reality is the government has a ton of debt that needs to be refinanced, and refinancing 2% above inflation will be very expensive. Markets are expecting two cuts this year, but at the rate the Fed is going, we may not see any. That will have consequences for all of us.

Coming this week

• Geopolitics will continue to dominate the news cycle all week.
• Fed officials aren’t really making the rounds this week, which is unusual after a meeting. Powell will deliver his semi-annual testimony to the House Financial Services Committee on Tuesday. Suffice it to say his testimony will be lively.
• On Monday, we’ll get some home data in the form of existing home sales. Then we’ll see the S&P Case-Shiller home price index and consumer confidence on Tuesday. New home sales and MBA mortgage applications will follow on Wednesday.
• We’ll get the second revision of first-quarter gross domestic product (GDP) on Thursday. The initial reading was -0.3% and the first revision was -0.2%.⁷ Maybe we’ll see some improvement and go from negative growth to flat?
• We’ll also get pending home sales and weekly unemployment on Thursday. Finally, we’ll see some fresh inflation data on Friday in the form of personal consumption expenditures (PCE).

Sources:

¹ Aditi Sangal, et al. CNN. June 23, 2025. “June 22, 2025 – Israel-Iran conflict.” https://www.cnn.com/world/live-news/israel-iran-conflict-06-22-25-intl-hnk. Accessed June 23, 2025.

² John Liu and Chris Isidore. CNN. June 23, 2025. “What is the Strait of Hormuz and why is it so significant?” https://www.cnn.com/2025/06/23/business/strait-of-hormuz-iran-israel-explainer-intl-hnk. Accessed June 23, 2025.

³ Lim Hui Jie. CNBC. June 23, 2025. “Iran’s parliament backs blocking Strait of Hormuz. Its closure would alienate Tehran further.” https://www.cnbc.com/2025/06/23/irans-parliament-approves-blocking-strait-of-hormuz.html. Accessed June 23, 2025.

⁴ Mariel Ferragamo, Diana Roy, Jonathan Masters and Will Merrow. Council on Foreign Relations. June 18, 2025. “U.S. Forces in the Middle East: Mapping the Military Presence.” https://www.cfr.org/article/us-forces-middle-east-mapping-military-presence. Accessed June 23, 2025.

⁵ Jennifer Schonberger. Yahoo! Finance. June 18, 2025. “Fed holds rates steady, stays on track for 2 cuts in 2025.” https://finance.yahoo.com/news/fed-holds-rates-steady-stays-on-track-for-2-cuts-in-2025-180123634.html. Accessed June 23, 2025.

⁶ David Lawder. Reuters. June 18, 2025. “Fed’s Powell says he expects to see more tariff-driven price hikes in coming months.” https://www.reuters.com/business/feds-powell-says-he-expects-see-more-tariff-driven-price-hikes-coming-months-2025-06-18/. Accessed June 23, 2025.

⁷ Bureau of Economic Analysis. May 29, 2025. “Gross Domestic Product (Second Estimate), Corporate Profits (Preliminary Estimate), 1^st Quarter 2025.” https://www.bea.gov/news/2025/gross-domestic-product-second-estimate-corporate-profits-preliminary-estimate-1st-quarter. Accessed June 23, 2025.

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