Warsh and Peace: Scenarios for Iran and the Fed

Deutsche Bank evaluates how Iran-linked oil price volatility will dictate the Federal Reserve's rate path across peace, muddle-through, and escalation scenarios.

Key Takeaways

• 1.Deutsche Bank outlines three scenarios for Iran-US tensions and their impact on Fed policy, centered on oil prices and the Strait of Hormuz.
• 2.Scenario 2 (status quo/muddle through) is seen as the highest risk for 2026 rate hikes as oil remains elevated enough to pressure core inflation but not enough to crush demand.
• 3.A 'Peace Deal' scenario would likely delay rate hikes to 2027 as headline inflation softens and risk premiums ease.

Table of Contents

• Scenario 1: Peace deal – Near-term hike risks subside, but hike potential remains further out
• Scenario 2: Peace deal fails and muddle through continues – Greater risk of 2026 hikes
• Scenario 3: Re-escalation – Two-sided risks to the policy outlook

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