PIMCO: Iran conflict could force Fed to raise rates

PIMCO’s chief investment officer Dan Ivascyn warned the Federal Reserve may need to raise interest rates instead of cutting them after the Iran conflict and a closure of the Strait of Hormuz pushed U.S. inflation above the Fed’s 2% target. He said those developments have compounded existing challenges for policymakers working to return inflation to target.

Ivascyn argued energy supply disruptions linked to the Strait of Hormuz added upward pressure on prices and on inflation expectations, making any move to ease policy riskier. He noted that central banks in Europe, the U.K. and possibly Japan appear to be tightening, and he did not rule out further U.S. tightening.

Ivascyn cautioned that lowering U.S. borrowing costs now could be counterproductive. “Any reduction in U.S. borrowing costs would be counter-productive . . . given the inflation dynamic and the uncertainty around inflation, the uncertainty around inflation expectations,” he said, adding such action “very well could lead to higher intermediate long-term rates.”

Other market leaders expressed similar concerns. Franklin Templeton CEO Jenny Johnson warned it will be difficult for the Fed to move to rate cuts while inflation remains elevated. Major banks have pushed back expectations for Fed easing; one large bank now forecasts the next two cuts in December 2026 and March 2027, citing energy-cost passthrough that should keep core personal consumption expenditures near 3% through 2026.

Economic data have tightened the Fed’s policy calculus. The central bank has held its benchmark range at 3.50% to 3.75% since January 2026, after three reductions in 2025. In March, consumer prices rose 0.9% month over month, lifting annual headline inflation to 3.3%. The personal consumption expenditures price index, the Fed’s preferred gauge, climbed to 3.5%, its highest level in nearly three years.

A higher-for-longer rate outlook is affecting financial markets. Elevated policy rates and a stronger dollar tend to compress valuations for risk assets, including major cryptocurrencies such as Bitcoin and Ethereum, with smaller tokens often seeing larger declines. Bitcoin briefly reclaimed $80,000 in early May, but market participants cautioned that a hawkish Fed shift at the June FOMC meeting could limit further gains.

Policymakers and investors will be watching incoming inflation readings, developments in energy markets and geopolitical events for signs of whether central banks will need to tighten further or can resume easing later in the year.