Is Iran’s Fed Formula Winning. The Interest Seems To Show It

OPINION

You ever bet against a horse and then watch it cross the line while you’re still explaining why it couldn’t

That’s roughly where I am with Iran. Two weeks ago I wrote that Tehran’s “Straits Taylor Rule,” the formula its parliament speaker, Mohammad Bagher Ghalibaf, posted in September to show how squeezing the Strait of Hormuz could push the Federal Reserve into raising rates, would get its hike eventually, just not on its schedule. I even set a test. If the Fed held on Oct. 28 and oil stayed near $110, Iran would have moved everything in its formula except the Fed.

The Fed held. Brent settled at $115.32 that day. Then the rest of the formula started paying out. Republicans lost Congress on Nov. 3. October’s inflation report came in hot. And on Tuesday, Fed Governor Christopher Waller said he is leaning toward a quarter-point hike in December, maybe a half-point. Traders now price the December hike as certain.

So here’s my revised read. Iran’s formula is winning on nearly every term it wrote: the vote, the inflation, the rate hike and the interest bill that comes with it. The one term it’s losing is the one with Iran’s own name on it, the price of oil. And Iran is paying a lot to keep pressing.

The vote Iran said it was aiming at

Iranian officials told Reuters in October that their new tactics at sea were meant to frustrate efforts to bring oil prices down before the midterms. They named the election as the target. They didn’t name the Fed.

On Nov. 3, Democrats took the House and the Senate. In CNN’s exit poll, 74% of voters said the Iran war was a crucial or major factor in their vote, Breitbart reported. In NBC’s, 87% said they were concerned about the cost of gas and diesel, and 62% said President Trump was responsible for high prices. Vice President JD Vance blamed the war for the defeat, CNBC reported. Ghalibaf took his victory lap on X the next day. “Conscience or the cost of living, Americans said NO TO WAR,” he wrote, and he warned Washington of a “Nightmare” if it ignored them.

Voters had plenty of other reasons. Ninety percent told NBC that government corruption was a crucial or major factor, and 57% said Trump’s immigration enforcement had gone too far. Iran didn’t win the election. But it picked an issue, and the issue won.

The hike is coming, and not only because of oil

The inflation numbers did their part. Consumer prices rose 0.4% in October, against the 0.3% economists expected, the Bureau of Labor Statistics said. Core prices, which leave out food and energy, rose 0.3% for the third month running. Shelter accounted for more than 30% of the increase, and food rose 0.5%. Employers added 165,000 jobs, far above forecasts, and unemployment dipped to 4.1%. Dallas Fed President Lorie Logan said Tuesday she sees two more quarter-point hikes before the Fed can pause, CNBC reported.

Waller, who voted for the October hold, explained it plainly in London on Tuesday. Markets had already priced in the tightening, he said, so “the precise timing of the hikes doesn’t matter.” Iran built a formula around a deadline. The Fed says it doesn’t do deadlines. It’s hiking anyway.

Waller also gave Iran’s oil term more credit than its price chart would. He said insurance and ship-to-ship transfers, which exist to guard against Iranian attacks in the strait, are reportedly adding $20 to $30 a barrel to oil prices, and that diesel isn’t expected to fall as fast as crude in a calmer Middle East. Diesel was still $6.13 a gallon on Monday. He pointed to Fed research suggesting core inflation has responded more to energy shocks since the pandemic. That’s how an oil shock reaches the grocery shelf. It goes through the truck first.

The bill Washington pays

Here’s the term Ghalibaf seemed to enjoy most. In September he jabbed at U.S. Treasury bonds. Iran never called the federal debt its plan, but a Fed hike is where the formula reaches it.

Washington paid more than $1 trillion in net interest in the fiscal year that ended Sept. 30, CNBC reported, and the Committee for a Responsible Federal Budget ranks interest as the government’s second-largest expense, ahead of defense. A Fed hike reaches that bill faster than most people think. On Oct. 31, $7.4 trillion of the government’s $32.2 trillion in marketable debt was in Treasury bills, about 23%, according to the Treasury’s monthly debt statement. Bills mature in a year or less and roll over at whatever short-term rates are by then, and those rates follow the Fed. The average rate on outstanding bills already rose to 4.01% in October from 3.87% in September, Treasury data show. By my rough math, every quarter point added to the rate on $7.4 trillion of bills is about $18 billion a year in extra interest. Picture a family with a quarter of its credit card balance on a variable rate, and a bank that just announced it’s raising rates in December.

The 30-year mortgage rate was 7.18% last week, up from 6.22% a year earlier, according to Freddie Mac. That’s the household version of the same bill.

The one term Iran is losing

Oil is where the formula breaks. Brent fell from $115.32 on Oct. 28 to $92.06 by Tuesday, about 20% in two weeks, after the election and after Trump said he had no immediate plans to strike Iran. Energy prices rose 0.7% in October, after 5.2% in September. Regular gasoline averaged $4.00 a gallon on Monday, according to the Energy Information Administration.

It isn’t because Iran stopped. Reuters counted 37 ships attacked in October, the most of any month in the war, and 10 more in November as of Wednesday, Gulf News reported. Tankers were hit again on Nov. 10. The pepper is still flying. The nose stopped twitching.

And the hike Iran wanted works against it here. Higher rates are meant to cool demand, and cooler demand means cheaper oil. Iran engineered the tool that’s built to end the inflation it started.

Meanwhile Iran is paying full price. Its government warned on Tuesday of gas shortages at home this winter because of war damage to processing plants, Reuters reported. Secretary of State Marco Rubio said this week that the economic pressure on Iran is “so devastating” that major combat isn’t needed. Iran is winning a pressure campaign with the meter running.

The case that Iran is getting too much credit

There’s a strong argument that I’m now giving Tehran too much. The parts of inflation driving the Fed, shelter, food and a hot job market, aren’t Iran’s doing, and they’d be pushing the Fed toward a hike with or without a single tanker attack. Voters punished an unpopular president for a long list of things, and the war was one of them. Trump’s approval among voters was 38%, according to NBC’s exit poll. The interest bill also climbs slowly. The average rate on all of Washington’s interest-bearing debt was 3.58% in October, because most of it was borrowed when money was cheaper and rolls over a slice at a time. By that reading, Iran is a loud passenger claiming credit for a car that was already going downhill. That’s a fair point, and on the Fed it may be mostly right. But Iran never needed to be the only cause. Its formula only needed every term to move in its direction, and on the vote, the hike and the bill, they did.

Tehran will claim the vote and the hike. The Fed will credit the data. The Treasury will just pay the bill.

The Fed decides on Dec. 9. November’s inflation report comes out on Dec. 10. Nobody, it seems, was consulted on the calendar.

Earlier in this series: “Iran Wrote a Formula to Move the Fed. Washington Is Answering With Oil Contracts.” (Oct. 4) and “Iran Set Its Watch to Oct. 28. The Fed Keeps Its Own Calendar.” (Oct. 29). Our US Economic Outlook tracks the data, and our Hormuz tanker attack tracker follows the attacks.