Powell Says Geopolitics Risks Are Elevated. What Israel-Hamas Means for Markets.

But the bigger picture, he added, is that the labor market is strong, and the Fed sees itself as making progress on inflation. If the conflict escalated, Powell said, energy prices could rise. But, he said, “it isn’t clear at this point that the conflict in the Middle East is on track to have significant economic effects.”

That sentiment can be hard to square with what seems to be a wave of chaos sweeping the globe. Israel, reeling from Hamas’s massacres, is pounding Gaza. Iran, which supports Hamas, continues to warn darkly that it will expand the conflict. The Houthi movement, which controls Yemen’s capital, Sanaa, is launching missile and drone attacks at Israel. Meanwhile, Russia’s war in Ukraine grinds on, and China still holds designs on Taiwan. Plenty of risk out there, indeed.

But for all suffering entailed by those conflicts, Powell is right that they largely remain potential threats to Western investors’ plans, not realized costs. How the war and its destruction will play out is an important political and human story. But its economic and impacts remain small in comparison. Russia’s assault on Ukraine delivered an economic shock to the world because both countries were deeply connected to global markets. Gaza isn’t—a fact that deserves more consideration by anyone who wants to live in a better world, but also one that means what happens there can only indirectly affect the rest of the global economy.  

It’s fairly easy to devise scenarios in which the conflict in the Middle East gets worse and has a negative impact on markets. The World Bank published a commodities report this week that looked at how high oil prices could go should hostilities worsen: up to $67 a barrel higher than the current baseline should the conflict engulf the region. 

But those are hypotheticals. More interesting is the set of mitigating factors that the Bank’s economists say make a full-on repeat of the energy crisis of the 1970s unlikely. Among them are the fact that the global economy is overall less dependent on oil than it was: “The amount of oil needed to generate $1 of GDP has fallen by more than half since 1970,” the Bank notes, meaning a new oil shock would simply hurt less.

At the same time, vast new oil supplies have been tapped in Canada and the North Sea. Strategic petroleum reserves in the U.S. and elsewhere have been established to help manage crises, and oil futures markets now help smooth markets. Those factors would help ensure that if the conflict widened, it likely wouldn’t lead to an economic repeat of President Carter’s grim presidency.

It also remains far from clear that the Middle East conflict will widen. The latest concerns relate to the Houthis’ attempts to join the fray, especially since they are backed by Iran. They control much of Yemen despite a devastating military intervention against them by the Saudis and their allies starting in 2015. On Tuesday, Yemeni television aired a statement saying that the Houthis would strike Israel with missiles and drones until Israel stopped its Gaza campaign, and they proceeded to do so.

That’s an unsettling development. But there is another way to look at it, even if you assume that the Houthi attacks in the war are really a thinly disguised assault by Iran. The Houthis would represent a low-cost way for Iran to respond to Israel’s Gaza operation while keeping the chances of regional escalation relatively small, says Michael Horowitz, head of intelligence at the LeBeck Institute, a risk consultancy. 

Since the war began, Iran has yet to go beyond the existing shadow war, either by attacking Israel directly or sending its proxy in Lebanon into full-on combat. U.S. forces in Iraq and Syria have come under attack recently, but even when the U.S. hit back last week, it said explicitly that it wants to avoid further escalation. 

Escalation also means something different in the Middle East, compared with Ukraine, which is bordered in part by nuclear-armed NATO. Any cross-border incident involving Russia carries an extra measure of risk, all the way up to planet-ending war. In the Middle East, the line is blurrier. Yemen, in particular, is in a state the locals call “no war, no peace.” There can, unfortunately, be some measure of additional violence without an obvious change in economic consequences. 

To be sure, what happens next isn’t solely in the hands of Israel, the U.S., or anyone else who wants to keep the chaos contained. “Iran’s threats to open fronts beyond Palestine appear credible,” writes Mohammad Ayatollahi Tabaar, an Iran scholar, in Foreign Affairs. The Houthis, Hezbollah, and other proxies could join Hamas’s fight. But more likely than an acute acceleration of the conflict is a continuing, midlevel crisis. Iran wants to achieve its goals—destabilizing Israel, empowering Hamas—but not at any cost. 

The same logic helps explain why China hasn’t invaded Taiwan. 

Just because oil markets are relatively calm shouldn’t make investors complacent. The costs of the chaos might simply be harder to find. Allianz, the insurer and asset manager, warns that social conflict has been rising around the world even before taking into account Hamas’s attack on Israel and Israel’s retaliation. The rising cost of food, fuel, and other necessities is making people restive all over the globe. “A packed election calendar in 2024 could set the stage for increased social risk in 2024,” Allianz analysts write. “Increasing social unrest has economic repercussions, stalling much-needed private investments in infrastructure.”

Even in the U.S., with those booming labor markets Powell mentioned, people can’t shake the feeling of economic gloom. 

For now, inflation, interest rates, and infrastructure are the factors moving markets. And if you can’t shake the thoughts of World War III, it might help to remember a bit of advice the research firm BCA offered after Russia invaded Ukraine: “If an intercontinental ballistic missile is heading your way, the size and composition of your portfolio becomes irrelevant.”

But the missiles are still in their silos for now. Skip the catastrophizing and focus on the fundamentals. 

Write to Matt Peterson at [email protected]