Welcome back, readers! Today is the last day the Forward Guidance newsletter’s Casey Wagner takes over for Byron. We’ll miss Casey, but you’ll have Byron back in your inbox Monday.

Today, Casey covers how the situation in the Middle East could impact the Fed’s interest rate decision. Let’s get into it:

Safe haven trade

Oil prices surged while global equities faltered Friday on fears that Israel’s attacks on Iranian nuclear facilities could escalate into a broader conflict. 

Brent crude, a benchmark for global oil prices, gained more than 8% in the early hours of Friday morning. West Texas Intermediate crude rallied as much as 14% before paring some gains, following reports from Iran that oil facilities were not damaged by Israeli airstrikes. 

Gold approached its all-time high as investors moved toward safe-haven assets. 

The S&P 500 and Nasdaq Composite indexes hovered in the red for most of the session, closing 1.2% and 1.3% lower, respectively. 

Trading like a risk asset, bitcoin was also in the red on Friday — trading 0.7% lower on the day at 4 pm ET to hover around $105,200. 

US Treasury yields moved higher Friday morning, signaling investors’ fear that higher oil prices could lead to prolonged elevated inflation. While Treasury prices typically rally on geopolitical uncertainty (remember, prices and yields move inversely), inflationary pressures could impact the Fed’s rate-cutting timeline. 

Speaking of the FOMC, this week’s data (more on that below) makes a solid case that while committee members will probably not touch interest rates next week, a cut — or two — before year end may be in the cards. At least that’s what markets were thinking, but geopolitical tensions have given investors reason to pause. 

Odds of the first 25 basis point cut coming in September were at 59% on Thursday but dipped to 56% Friday morning, per data from CME Group. 

The shift, slight as it is, supports the narrative that traders are selling US Treasurys on fears the Fed may keep interest rates higher should oil prices stay higher. 

Early reports suggest that the situation in the Middle East will not be resolved quickly; Iran has vowed “severe” retaliation and has pulled out of a planned nuclear talk with the US. 

President Trump on Friday confirmed to reporters that he knew Israel was planning on attacking Iran, but the Wall Street Journal reported that earlier in the week, he’d asked Israeli Prime Minister Benjamin Netanyahu to stand down. 

This paints an uncertain picture, and investors appreciate certainty. So does the Fed. We’ll be back on Monday with a preview of what to expect from next week’s rate-setting meeting.

— Casey Wagner

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