By Randall W. Forsyth

Sometimes what doesn't happen can be as important as what does. Case in point: the limited flight to quality in the traditional haven assets -- the U.S. dollar and Treasury securities -- in response to Israel's attack on Iranian nuclear facilities at the end of the past week.

The U.S. Dollar Index, which represents the greenback's value versus a basket of major currencies, barely rose from a three-year low on Friday. Treasury note and bond prices dropped, rather than rising as typically happens during periods of geopolitical stress. U.S. stocks slipped, with the S&P 500 index losing 1.13% on Friday ahead of a highly uncertain weekend after Iran launched retaliatory strikes against Israel, but the index ended the week off just 0.39%.

Oil prices did rise in reaction to the heightened tensions in the Middle East, with front-month U.S. crude futures jumping 7.26% on Friday to settle at $72.98 a barrel, a four-month high, and 27.74% higher than its recent low touched on May 5. But this may be just another leg up in a bear-market rally as the benchmark crude remains 8.82% below its Jan. 15 peak of $80.04. (See related story here.)

The relative equanimity with which markets reacted to the latest escalation of Middle East conflicts may reflect expectations that the disruption in energy prices will be limited. Only a more severe damage to energy infrastructure or disruption of transit through the Strait of Hormuz, a key route for tanker traffic, would produce a lasting rise in energy prices, writes Jonas Goltermann, deputy chief markets economist at Capital Economics. Oil producers have plenty of spare capacity to offset temporary disruptions, he adds.

How different that is from a generation ago, when conflict in the region set off price spikes and long lines at filling stations in the U.S. Retail prices for regular gasoline now average $3.132 a gallon nationally, according to AAA data, off a couple of pennies from a month ago and down from $3.460 a year ago.

Prices at the pump have an outsize impact on the mood of U.S. consumers. The updated numbers from the University of Michigan released this past Friday showed improved sentiment and lower inflation expectations. The latest, lower-than-expected readings on consumer and producer prices in May also showed little impact from tariff hikes thus far, although importers' stockpiling of goods ahead of the April 2 Liberation Day import levy announcements probably muted the effects. The final level of tariffs is uncertain at this point, but various economists estimate that imports will be hit with levies of about 14%, several orders of magnitude higher than before.

The inflationary impact of tariffs and possibly higher energy costs will figure in the Federal Open Market Committee's deliberations this coming week. While no change in the Federal Reserve's key federal-funds policy rate target range, currently 4.25% to 4.50%, is likely, all eyes will be on the committee's new Summary of Economic Projections and on Fed Chair Jerome Powell's Wednesday afternoon news conference.

The big thing to watch for is the number of cuts implied by the median year-end fed-funds projection. The last SEP, released after the March confab, had a median December policy rate of 3.9%, implying two quarter-point reductions. A number of Fed watchers think the median guess may be revised to just a single quarter-point trim by December.

That would probably not sit well with President Donald Trump, who reiterated his call for Fed rate cuts following the restrained inflation releases this past week, while adding he won't "fire" Powell. A recent Supreme Court decision appeared to exempt the Fed from executive interference. But, as colleague Nicole Goodkind reports, that exemption may hang by a footnote in the court's decision. Count on Powell's job security to be a major line of reporters' questions at his presser.

That's just one of the major risks hovering over the financial markets. Along with international geopolitical risks, over which Washington appears to have diminishing influence, domestic protests spread in cities across the nation this past week. On the strictly economic front, the One Big Beautiful Bill Act for taxes and spending faces an uncertain fate in the Senate, which may play havoc with the looming federal debt-ceiling "X date," when the government's fiscal managers finally run out of wiggle room.

And yet risk markets show little stress. High-yield bond spreads, a key barometer, continue to narrow, to just over three percentage points above comparable Treasuries. That's a level that historically has been associated with junk market peaks. It also marks a sharp recovery from the recent wide level of 4.6 percentage points during April's tariff-induced swoon in stocks and other risk assets. Some observers suggest the risks in credit may lurk out of view in the opaque private markets.

In the public markets, meanwhile, risk appetite is hearty. GameStop, the prototypical meme stock, issued $2.25 billion of convertible securities to buy up cryptocurrencies and had to increase the size of the private deal to meet investor demand. That follows the tack of MicroStrategy, which has repeatedly tapped the capital markets to fund its crypto cache.

From the markets' lack of reaction, you wouldn't know missiles were flying in the Middle East while political and economic policy uncertainty reigned domestically.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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June 13, 2025 20:05 ET (00:05 GMT)

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