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Chapter 1: What does the ceasefire in Iran mean for the U.S. economy?
Listen to me. Markets are bigger than us. What you have here is a structural change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it.
Welcome to Prof G Markets. Scott is off for spring break, but he will be back next week. In the meantime, we have a big episode to share with you today with one of our favorite Prof G Markets guests. So let's get right into it. President Trump issued an unprecedented threat against Iran on Truth Social Tuesday, warning that a whole civilization will die tonight.
Hours later, he announced a two-week ceasefire. As part of the agreement, Iran said it would reopen the Strait of Hormuz, but would impose a fee of $2 million per ship to help fund its reconstruction efforts. The market's reaction was immediate. Brent crude fell below $100 a barrel. S&P futures jumped, signaling a sigh of relief.
And on Wednesday, Defense Secretary Pete Hegseth declared, quote, decisive military victory over Iran.
Chapter 2: How is the market reacting to geopolitical tensions?
But General Dan Kaine said the U.S. is ready to resume attacks if the ceasefire falls apart. Meanwhile, Israel continued its Hezbollah strikes, and the Strait of Hormuz remains jammed. So the situation is not resolved yet. and the economic impact is now coming into focus once again.
The conflict is expected to push inflation higher, with Bank of America projecting the Fed's preferred measure, PCE, could approach 4% this quarter. So for investors, the big question is, how do you navigate this kind of uncertainty? Here to help us answer these questions, we are joined by the chief economist at Moody's Analytics, Mark Zandi. Mark, good to have you on the program. So,
at the beginning of the week, the question was, are we going to bomb Iran? Are we going to nuke Iran? Was actually a question that a lot of people were asking. The answer was no. But I think the question becomes now, have things changed? Because of the fact that we made this threat, now we have this ceasefire, which is Kind of a ceasefire. Not really. We can get into the details.
But I guess, how has this adjusted your views of what's going to happen in the markets and perhaps in the economy in the U.S.?
Feels pretty close to script, more or less. You know, the president has gone down this path in other ways. And when push comes to shove, when markets start to react, when stock prices are down, when interest rates are up, In this case, when oil prices are up, he figures out a way to pivot, to stand down and to declare victory and hopefully move on.
And, you know, this go-around, that's been more difficult than, you know, with other similar events. Greenland comes to mind most recently. This one's been more difficult just because of the Iranians' leverage over the Kurds. over the straight. But nonetheless, that feels like where we're headed here. And that's kind of sort of what I think markets have been anticipating.
You know, if you look at stock prices, for example, as a benchmark, you know, even at the worst of the angst around what was going on in the Middle East, they were down on the S&P 5 to 10 percent. So not even a you know, typical correction. So I think investors were expecting the president to do something like this. And in fact, that's now what he's done.
Now, clearly more script to be written here. We'll have to see how this plays out. You know, it's hard to imagine that it's all going to go forward without any difficulty. It feels like there's more problems dead ahead, but we'll see. But this so far feels kind of sort of what investors have expected. It's close to, as I said, it's pretty much sticking to script.
I mean, one thing that has changed from before, I mean, I would argue that once you threaten nuclear warfare, the whole world has changed for various reasons that maybe we can't see them. But one thing that is a legitimate material change that has happened as a result of these, I guess, negotiations is that now Iran is charging $2 million for every ship that passes through the Strait of Hormuz.
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Chapter 3: What are the inflation forecasts related to the current conflict?
Right. And then traders are going to demand a risk premium. They're not going to hold old prices without a premium, thinking that, again, the Iranian regime is still in place and can still create havoc and more than likely at some point will. Therefore, you've got to pay me a higher fee. So if you told me –
After everything kind of normalizes, winds down, hopefully that's by the end of the year, that oil prices are at $80 a barrel. That sounds about right to me. So we were at $60. We got as high as $110 before the ostensible ceasefire.
Chapter 4: How might the ceasefire affect investor strategies?
With the ceasefire, the oil is now trading at $95. And if you told me at the end of the year it's $80, I'd say that sounds about right. Now, For the U.S. economy, that's obviously not good. We're paying more for oil and other products that are coming from the Middle East, agriculture, chips, aluminum, lots of different commodities. So it adds to inflation. It weakens growth.
It adds to the ill effects of the tariffs, which do the same thing. They raise inflation, weaken growth. But, you know, the economy can navigate through without an economic downturn. It's much diminished by what's happened and what's going on, but it's not pushed under by what's going on. Now, I'm just obviously focused on the very near term.
You know, next month, next six months, next year, there's other longer term consequences of all this. And, you know, you mentioned about the kind of the implicit threats around using nuclear weapons. You know, those things have consequence, I think, in the long run. They're not cliff events per se, but they're corrosives on economic growth and just creates general angst, uncertainty.
And that's just not good for business in the long run.
Yeah, how does that play out, those long-term consequences? Because I feel like we're so focused on direct effects right now, because we're talking about guns and missiles and nuclear bombs, and it seems almost ridiculous to try to map out what are the second order effects going to be of dropping a nuclear bomb or not. It's like, whatever, you dropped a bomb.
But what are some of those second order effects here? I mean, how do you think that this ceasefire that was preceded by very, very scary threats and that may not really last, at least that seems to be the situation right now, how would that affect our economy further down the line?
Yeah, I view this as a part of a broader, very corrosive trend, and that's the deglobalization of the economy, that the U.S. is pulling away from the rest of the world very quickly. I mean, you know, tariffs, immigration policy, you know, what we're doing geopolitically. And then, of course, now the rest of the world is pulling away from us, you know, very, very quickly.
And when you make, you know, raise the specter of military action and even implicitly make reference to potential use of nuclear weapons or other weapons of mass destruction. It just makes everyone nervous about your ability to lead and the stability of your leadership and what you have in mind. And I think it means that the rest of the world is going to be looking for
different partners to do business with. And, you know, the U.S. is a big economy. It's the largest on the planet. So, you know, it's still going to play a very central role, but increasingly less of one as we move forward. And if that's the case, if we are deglobalizing, and this is just one more thing that will cause that process to continue and potentially even accelerate.
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Chapter 5: What are the potential long-term effects of the ceasefire on the economy?
You know, the nation has benefited enormously from the globalization process and the fact that the U.S. is central and the U.S. dollar is central to everything that goes on in the world. And that is now going to be under pressure. It's under pressure before all this. It will be under even more pressure going forward.
And, you know, again, it's not one of those things that manifests in a particular event. It could, but that's unlikely. It's one of those things that just plays a role longer on in markets. So, you know, for example, we're going to have to pay higher interest rates. And you can kind of see it. In the current context, right?
I mean, historically, you might have thought if we had this kind of event and a risk-off environment and people are nervous and scared, the capital will come flowing into the United States, interest rates would decline. But that's not what's happened. Interest rates actually have increased. You know, the 10-year treasury yield before this, all this was below 4%. We got as high as 4.5%.
Today, we're sitting at 4.25%. You know, that's indicative of things moving in a direction that's very, unusual, unexpected. There may be lots of reasons for that, but one of the reasons may be, I think, that the safe haven status of the U.S. is under pressure because of events. We're no longer deemed to be the rock, the place you go when things are going bad.
And we're going to pay a price for that in many, many ways, but it's most manifested most immediately in the form of higher interest rates.
So higher interest rates, higher gas prices long term, I assume, is the trajectory. I mean, I guess one question is, oil prices surged above 100, they were approaching 150, and now they're coming back down.
And your suggestion is that if things remain as they are, which is like, there's a little bit of a ceasefire, but bombs here and there, but the straight isn't completely closed, then maybe we'll hit 80. I guess the question is, does the fact that oil was at close to $150. Does that trickle through down to gas prices in the long term in any way?
And what is the overall trajectory of gas prices at this point?
A good rule of thumb for U.S. gasoline prices, the cost of a gallon of regular unlighted, is that for every $10 sustained increase in oil price, you get $0.25 increase in a gallon of regular unlighted. So If we were $60 before this all started, we kind of peaked out on a weekly basis around $110. I'm rounding, obviously, to make the arithmetic easy. That's a $50 barrel increase.
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Chapter 6: How will rising oil prices impact inflation and consumer costs?
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We're back with Profiteer Markets. When you do anything that increases inflation at a structural level, which seems has happened here, it's almost like you're testing the consumer. Are you down to pay this much? And then when the consumer does pay, largely because, what, you're going to not pay for gas at this point? I mean, most consumers need to pay for gas. And it's like, oh.
They can afford it. They're good. The consumer is spending, which is obviously going to make the inflation even stickier. I think the big question then becomes, what does this mean for the Fed? And, I mean, coming into 2026, what was so striking was that... Investors seem to recognize, yes, there are some headwinds here. Yes, we're worried about the AI story.
It might be a bubble, and that's causing some concern, et cetera. But generally, the story which I even bought myself and said on this podcast was, yes, but we are entering a rate-cutting environment. And so the idea of betting against the stock market in a rate-cutting cycle is pretty bold and maybe one that you should sort of second-guess. And now inflation's rising again.
We've had tariffs plus this. And it appears as though the Fed might be interested in even hiking rates. That is increasingly becoming a probability. What do you think this means for the Fed and the Fed's decision? And how might that affect asset prices moving forward?
I mean, I think the Fed, for the foreseeable future, at least next couple, three meetings, is on hold, that they're just going to sit on their hands for two reasons. One, they don't know how this is all going to play out. You know, what exactly is the ceasefire? Is it going to hold? You know, what does it mean? Where are all the parties going?
I'm giving you my forecast, but I say it with no confidence. So reason number one for doing nothing, sitting on their hands, is the uncertainty. The other is the nature of the shock, just like tariffs. It weakens growth. It hurts the job market. And since Liberation Day a year ago, we've created no jobs. You know, some months up, some months down, but net-net, we've gone nowhere.
And now you're throwing this into the mix. All else equal, that would say to the Fed, you should be cutting interest rates, right, because your mandate is full employment. But conversely, you have higher inflation and your other mandate is low and stable inflation. So all is equal, that argues for higher interest rates. So the net of all that is, I don't know. I'm just going to sit on my hands.
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Chapter 7: What are the implications of the Fed's interest rate decisions?
But even abstracting from that, it doesn't feel like investors that are pricing in that risk, which one perspective on that is, well, maybe you guys are just overstating the case. The uncertainty isn't as big a deal as you think it is. The other is, well, markets kind of move in a very discontinuous way. They're okay until they're not. And you don't know exactly what the catalyst for not is.
What is it going to tip the psychology in the marketplace and everyone kind of runs for the door at the same time? That kind of feels like – that, again, goes back to those recession probabilities. They're close, but they're not quite there. But if people lose faith and start running for the doors, which is a real distinct possibility, that's the fodder for an economic downturn.
But that's the one – you know, a holdout for the argument that, no, you know, this isn't great. You know, it's not bad. You know, this is not, this is not, no one wants to pay higher prices and see weaker growth, but we're still going to be able to navigate through. That's what the stock market is saying. That's what the corporate bond market seems to be saying, at least at this point.
We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com.
Thank you.
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