by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on the upcoming Fed announcement following its two-day meeting. We then provide an update on the conflict in the Middle East. Next, we highlight key market developments, including a US company’s acquisition of a mining firm in Africa, Beijing’s greenlight for Nvidia to sell more chips into China, and the drag on the Chinese economy from higher aluminum prices. As always, we include a summary of recent US and international economic data releases.

Fed Thoughts: The FOMC will issue its statement and hold a press conference after its two-day meeting, setting out its latest views on inflation and the economic outlook in the wake of the recent Middle East conflict. In the run-up to the decision, markets have pared back expectations for rate cuts this year, and some participants are even speculating that a hike could be back on the table. Fed funds futures now price in roughly one rate cut over the course of the year, and the outcome of this meeting is likely to be a key driver of Wednesday’s market action.

• In the run-up to the meeting, there were already signs that some Fed officials were growing more cautious about cutting rates. Minutes from the prior meeting suggested that the combination of prospective tariffs and a stronger-than-expected economy warranted at least a shift in the committee’s language, including clearer guidance on the conditions under which another rate hike could be considered if inflation failed to make progress toward the Fed’s 2% target.
• The escalating conflict in the Middle East is likely to push US officials toward a more hawkish stance. Just before the Fed entered its 10-day blackout period, several officials downplayed the possibility of further rate cuts. Both Boston Fed President Susan Collins and Minneapolis Fed President Neel Kashkari signaled their opposition to another cut this year. Meanwhile, New York Fed President John Williams acknowledged the risks but left the door open for a potential move.
• Although the market expects the Fed to moderate its rate-cut outlook, attention will remain fixed on any signals of a potential hike. The last major oil shock, in 2022, prompted the Fed to aggressively tighten policy to address supply and demand imbalances. This time, however, a less tight labor market and considerably lower inflation suggest the central bank may have more room for patience before considering a similar action.
• While we expect the Fed to keep rates on hold, a pivot in signaling from cuts to potential hikes could still provoke a sharp market reaction. Any indication of future tightening would likely amplify concerns that the economy may come under increasing strain from the combination of higher interest rates and elevated oil prices. In turn, this could spur a broad de‑risking shift, pushing investors toward a more defensive stance in their portfolio positioning.

US Fights On: The US-Israeli conflict with Iran has kept oil prices below $100 a barrel, though they remain elevated as the timeline for a resolution remains unclear. On Tuesday, President Trump stated that the US is prepared to act unilaterally to defend the Strait of Hormuz following pushback from NATO allies. Simultaneously, Iran has intensified its regional campaign, targeting natural gas facilities in the UAE. Despite these tensions, equity prices have remained resilient, as the market continues to have optimism that conditions will not worsen from here.

• The White House appears determined to press ahead with the conflict as it seeks to disarm Iran. In an Oval Office meeting, the president sharply criticized allies that refused his request for assistance in the strait, openly questioning their loyalty but vowing to continue the campaign. He has also ordered continued strikes on Iran’s key oil facilities on Kharg Island in an effort to pressure Tehran back to the negotiating table.
• Iran’s security establishment has suffered a major setback following the confirmed death of Ali Larijani, a key architect of the country’s military strategy. His loss removes one of Tehran’s more pragmatic power brokers, potentially tilting the balance of power in favor of hardliners. Yet despite the blow, Iran remains resolute in pursuing its campaign to disrupt maritime traffic through the Strait of Hormuz.
• While some investors fear oil prices could breach the psychologically significant $100 mark, broader market sentiment reflects confidence that such a move is unlikely in the near term. The White House has been actively working to stabilize energy supplies and prevent a sharp price surge. On Tuesday, it announced plans to ease sanctions on Venezuela to help ease supply constraints and authorized the reopening of an offshore oil pipeline in California.
• So far, markets have largely digested the conflict through a rotation rather than a broad-based selloff. The S&P 500 is only modestly lower year-to-date, even after a relatively weak start, while the S&P SmallCap 600 index and S&P MidCap 400 have surrendered most of their earlier gains. We expect large caps to continue to outperform if the conflict worsens, but we see room for that leadership to reverse should geopolitical tensions begin to ease.

US Mining Expansion: A US-based minerals company is set to acquire a mining operation in the Democratic Republic of the Congo. The deal reflects a broader shift in Washington’s Africa strategy, moving from humanitarian aid toward strategic investment partnerships. The DRC, the world’s largest producer of cobalt and the second-largest producer of copper, sought US security assistance in exchange for its mineral wealth. The move highlights that the US is building close relationships with countries through security rather than trade guarantees.  

China Approves Chips: Nvidia has received approval from Beijing to resume selling certain chips into China. This decision will allow the company to once again supply its H200 processors to Chinese firms, following a tense standoff between Washington and Beijing over chip and materials exports aimed at curbing each side’s AI ambitions. While the partial resumption of trade suggests a modest easing in tech‑related trade frictions between the two powers, it is unlikely to mark the end of their broader strategic dispute.

Aluminum Woes: A pickup in aluminum prices has begun to dampen demand in China, as many manufacturers grow reluctant to place new orders. The resulting drag on aluminum-intensive activity is likely to weigh on the economy at a time when it is already contending with higher oil prices and tighter trade tariffs. Taken together, these pressures suggest that the conflict in Iran is likely to further restrain China’s growth outlook.

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