If the ceasefire between the US and Iran is indeed “over,” as Donald Trump declared on Wednesday, it’s bad news for Kevin Warsh.

Brent was back near $80 mid-week amid renewed hostilities in the Gulf, where the IRGC targeted US bases in retaliation for American strikes on Iranian military sites. The dustup began on Tuesday, when a Saudi oil tanker and a Qatari LNG vessel were damaged in the Strait of Hormuz.

“I don’t want to deal with them anymore, they’re scum,” Trump said of the Iranians. He was regaling reporters in Ankara, where Recep Tayyip Erdogan’s hosting a NATO summit. “They’re scum,” Trump reiterated. “They’re sick people.”

The read-across for US rates was initially limited, but Warsh was counting on a sustained drop in crude to take pressure off headline inflation. Notwithstanding the usual media hyperbole (e.g., “Oil surges”), the move in crude wasn’t all that dramatic. Certainly not for a volatile commodity.

In the context of Treasurys, “oil’s move back above $75 is far less troubling than if prices were sustainably above $100,” BMO’s US rates team remarked. “The weightier risk is that the conflict’s timeline has been effectively reset [but] it isn’t entirely obvious that a materially longer conflict will necessitate >$100/bbl crude,” they wrote.

That’s a simple, but important, point. It’s fair to say the world absorbed what the IEA in April described as “the most severe oil supply shock in history” with relative ease, certainly compared to the high drama precipitated by Russia’s invasion of Ukraine.

That’s not to say we’re out of the proverbial woods when it comes to the knock-on effects from the conflict. But if you’d asked 100 experts 10 years ago to guesstimate price increases for all things “petro” following a three-month closure of the Strait, almost all of them would’ve conjured some version of armageddon.

Still, the spike in US pump prices was historic and it pushed up headline inflation at a time when American households hadn’t yet recovered psychologically (or financially for that matter) from the once-in-a-generation price level shock that followed the pandemic.

The risk for Warsh is that continued upward pressure on inflation from elevated crude prices in the near- to medium-term renders moot an otherwise plausible point about long run structural disinflation from AI-related productivity gains.

Warsh has leaned pretty heavily on that argument in sparse public remarks since taking the reins from Jerome Powell. But Apple’s price hikes underscore the notion that even if the technology proves to be disinflationary over the long run, the AI buildout could push consumer prices higher in the meantime.

And that’s to say nothing of the notion that capex booms tend to push up the neutral rate, at least for a time, necessitating higher policy rates. Failing to hike rates in such environments is to countenance passive easing, risking additional upward pressure on inflation.

With that in mind, just about the last thing Warsh needs is another run-up in crude. If oil were to approach triple digits again between now and this month’s FOMC meeting, Warsh would have a public relations problem on his hands. Luckily for Kevin, he jettisoned forward guidance at his first meeting and swore off “over-communication.”

Recall that half of FOMC participants expect to hike rates in 2026, according to the June dot plot. Warsh declined to submit a rate projection, but if he had, his dot very likely would’ve tipped an inclination to keep rates unchanged this year on the assumption oil prices will normalize.

The big question now isn’t so much whether the US and Iran are careening back towards all-out war with everything that might entail (e.g., US strikes on the country’s energy infrastructure), but rather if the events of the last 48 hours scuttle any hope of a deal that settles the conflict during the 60-day negotiation window. As if there were any hope of that in the first place.

“Presumably, the supply glut concerns that pushed oil back to the pre-war range earlier this month are limiting the near-term rally potential [but] such supply dynamics only have a certain shelf life,” BMO’s rates team went on, commenting further on the move in crude Wednesday.

“The next phase for the US rates market will be assessing the forward inflationary implications resulting from the end of the ceasefire, a dramatic tone shift versus the prior assumption that even if a peace deal wasn’t achieved within the 60-day window, both sides would simply extend the negotiating timeline,” the same note read.

Later, Trump renewed his long-standing threat to seize Kharg Island and said that although he’d “hate” to attack Iran’s desalination plants, he “may have to.”