Stephen Miran, a Federal Reserve Governor, said it is too early to form firm views on how the conflict in Iran will affect the economy, in an interview with Bloomberg TV on Wednesday. He also said evidence that oil prices feed into core inflation is quite limited. He said the current situation differs from Russia’s invasion of Ukraine in 2022 because monetary and fiscal policy were more expansionary then. He cited a 2-year trend of labour market weakening and said it is too early to dismiss that trend based on one or two months of data.

Policy Outlook And Inflation Risks

Miran said markets do not appear concerned about long-term inflation expectations. He said 1 pp of rate cuts would be appropriate this year. He said the Fed could undershoot its 2% inflation target if housing inflation decelerates as expected. He added it would be appropriate to keep cutting at the March meeting and that the conflict in Iran has not changed his outlook. He said he would like to continue with quarter-point cuts until the Fed reaches a neutral rate, and then reassess. With a clear signal for a rate cut at the upcoming March meeting, we should anticipate a continuation of the recent bull steepening in the yield curve. Derivative strategies that benefit from falling short-term rates, such as buying SOFR futures, seem well-supported. Fed funds futures are already pricing in an 85% probability of a 25-basis point cut this month, making this guidance a confirmation of market sentiment.

Market Volatility And Trading Implications

The official view that the conflict in Iran is not a major inflation concern helps to suppress market volatility. This suggests that selling volatility through strategies like shorting VIX futures or selling strangles on major indices could be advantageous. The CBOE Volatility Index (VIX) has remained subdued around 15, a stark contrast to the spikes above 30 that we saw during the 2022 Ukraine crisis, indicating the market believes this event is contained. We see a deliberate effort to separate oil price movements from monetary policy decisions. Even as Brent crude futures have climbed 7% in the past month to over $86 a barrel, the message is that this will not provoke a hawkish response. Traders can therefore focus on oil-specific supply and demand factors without having to price in a corresponding Fed reaction. The focus on the two-year trend of a weakening labor market, rather than recent strong data, reinforces the commitment to easing policy. While the last jobs report showed a surprising gain of 250,000, we note the 6-month moving average has slowed to 165,000, continuing the cooling trend observed throughout 2025. This gives the Fed cover to continue its planned rate cuts despite any single month of strong numbers. There is a growing concern about inflation falling too far, particularly if housing costs decelerate as projected. With year-over-year growth in the national rent index already having slowed to 2.9% from over 5% last year, this risk of undershooting the 2% inflation target is credible. This outlook supports positions that would profit from rates being lower for longer than the market currently anticipates. Create your live VT Markets account and start trading now.

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