The market hasn't realized the danger yet? Institutions warn: The Federal Reserve, U.S. economy, and stock market are all underestimating the impact of Iran

Aurora Research believes that, at least for now, the US economy, the US stock market, and the Federal Reserve are all behaving as if the Iran war has not produced any substantial impact.

Dimitris Valatsas, founder of Aurora Macro Strategies, stated bluntly: "I still think the Federal Reserve has misjudged the situation. They will have to raise rates this year, but they just haven't realized it yet."

In Valatsas’s view, over the past five years the Federal Reserve has consistently failed to achieve its 2% inflation target, and the current trend is clearly "continuing upward and further deviating from the target." He expects that the Consumer Price Index (CPI) to be released this Friday will show inflation rapidly approaching 3.5%.

Valatsas is especially surprised by the relatively calm remarks made by Federal Reserve officials. Recent statements from both Fed Chairman Powell and New York Fed President Williams do not seem to reflect real awareness of the spillover effects from the Iran war. Valatsas points out that the nationwide average price of gasoline in the US has already risen to $4.10 per gallon, up by about one third from last month, yet this has not clearly shifted the officials’ assessments.

He particularly notes that Williams had said the inflationary impact of the oil price shock "is expected to partially reverse later this year," provided that "oil prices fall after hostilities end." Valatsas sarcastically replied: "Even for economists, that’s a series of rather bold assumptions."

In his opinion, it’s not just the Federal Reserve that is underestimating the consequences of this conflict—the US economy and capital markets are doing the same.

Valatsas notes that the US added 178,000 jobs in March, unemployment fell to 4.3%, and average hourly earnings grew 3.5% year-on-year. These data show that the US labor market is "almost entirely unaffected by developments in the Middle East."

Meanwhile, the latest monthly report from the Institute for Supply Management (ISM) shows the manufacturing economy is still "healthy and continues to expand," and overall economic activity remains robust. Therefore, Valatsas believes the US economy is currently "almost completely unaware that an oil crisis is unfolding."

Moreover, reactions in the financial markets are also surprisingly calm.

Last week, despite ongoing geopolitical turmoil, the US stock market still recorded a 1.6% gain, with European stocks also climbing, while US Treasury yields fell back. Valatsas particularly notes that UK and Japanese stocks have remained on the rise so far in 2026, even though these two markets, given their fragile fiscal positions and high external energy dependence, are actually on the "front line" of the Iran war’s economic shock.

According to Aurora, the current market calm and composure face two key risks: further expansion of the bombing range, and a rising possibility of direct ground force involvement. Any of these could quickly shatter the current sense of tranquility and complacency.

Aurora expects Iran’s "red line" to grow increasingly tougher; meanwhile, Trump will also need to produce a face-saving outcome before the midterm elections in November.

Therefore, Aurora warns that all major scenarios surrounding current developments "carry significant downside risks."