US equities have held up well in the face of uncertainty: the Trump administration had been inching towards joining Israel in attacks on Iran. On Saturday evening, the US finally intervened, and warplanes bombed three sites in Iran. The attacks have exposed splits within the ‘Make America Great Again’ political movement, with critics such as Steve Bannon (former strategist in the first Trump administration) condemning the US military intervention.
The Fed chair, Jay Powell, remained impassive last week. He did not mention Iran or Israel in his post-FOMC speech, until probed on events in the Middle East by a journalist. The US is “far less dependent on foreign oil than it was back in the 1970s” and the Fed chair was not moved to cut interest rates: “Despite elevated uncertainty, the economy is in a solid position”.
The Fed chair barely discussed the US administration’s fiscal policy, even though the Congressional Budget Office (CBO) has revised up its estimate for the cost of the ‘big, beautiful’ legislation winding its way through the Senate. The new estimate for H.R. 1, One Big Beautiful Bill Act suggests that the Trump fiscal stimulus will now cost $2.8 trillion over the years 2025 to 2034.
In this context, investors will understandably be nervous that the Trump peace dividend is disappearing fast. The US involvement in the Israeli-Iran war is sparking unrest in the Trump camp, as supporters worry that the administration is getting sucked into a long, protracted military engagement, with inevitable costs. That could make the CBO’s pessimistic assumptions a reality and would elevate further the term premium for Treasuries.