Fed and markets weigh risks as Iran negotiations continue in Pakistan

Fed commentary and uncertainty over Iran

Financial markets are on edge, assessing the potential consequences if Iran agrees to a ceasefire or if tensions escalate further in the Middle East. The outcome is due to become clear within hours. As investors brace for developments, S&P 500 futures were down by 0.4 percent, and Europe’s Stoxx 600 index relinquished its earlier gains. Meanwhile, news of attacks on military targets on Iran’s export-critical Kharg Island pushed oil prices higher.

Diplomatic contacts and regional dynamics

Despite U.S. Vice President Vance’s optimistic comments about the possibility of resolving the Iran standoff, former President Trump voiced the opposite opinion, casting doubt on diplomatic progress. Two Pakistani sources familiar with the ongoing discussions offered an inside look at the delicate negotiations:

“Contacts with Iran are ongoing; efforts continue to bring all sides to the negotiating table. Iran’s missile attacks against Saudi targets threaten to derail the talks. While Iran is signaling some flexibility during the negotiations, it continues to impose preconditions. Should the conflict intensify, Pakistan, under its defense agreement, would stand by Saudi Arabia.”

These remarks highlight Pakistan’s dual role as both an intermediary and a potential party to wider regional dynamics, depending on how the situation develops.

Elsewhere, New York Fed President Williams concluded his closely watched remarks at 15:50, providing important signals about the central bank’s outlook for inflation, the labor market, and monetary policy. Key points from his speech included:

“The impact of the Iran conflict is expected to drive overall inflation higher. This year, inflation is forecast to hover around 2.75 percent. My focus is strongly on core inflation, where little has changed so far. Tariffs remain a significant contributor to inflation.

The ongoing conflict could push core inflation up by one or two percentage points. At the moment, monetary policy is appropriately positioned to watch developments, with flexibility to adjust if needed.

I expect GDP growth for this year to fall in the 2 to 2.5 percent range, while unemployment should remain stable. The labor market situation is quite complex, with hiring and layoffs at subdued levels and the unemployment rate showing steadier trends.

Overall, the U.S. economy remains remarkably resilient, with technology continuing to support productivity levels.”

In the wake of Williams’s speech, market expectations for an interest rate cut by the Fed in 2026 remain firmly below 12 percent, indicating continued caution among investors about the timing and likelihood of monetary easing.