Mohamed El-Erian: There's is debate whether Middle East conflict will escalate

Geopolitical Risk and Market Reaction - Markets are uncertain about escalation or de-escalation of geopolitical conflicts, lacking a clear view of future developments [2][3] - The market has been conditioned to "fade" geopolitical shocks, but the cost of being wrong is high, particularly in the oil market [3] - Oil prices are unstable, with a potential $15/barrel downside due to excess supply or a $15/barrel upside if major Middle East supply disruptions occur [4] Economic Implications - Direct effects on US growth and inflation are uncertain, dependent on whether the US strike on Iran escalates or de-escalates the conflict [5] - Indirect effects include precautions on the supply side and potential hesitancy on the demand side, though smaller and more dispersed than direct effects [6] Monetary Policy - The market is now pricing in two rate cuts this year, with the probability of a September cut rising to almost 80% and a July cut at around 20% [9] - There's a debate within the FOMC regarding the timing of rate cuts, with some advocating for sooner rather than later [10][11] - Concerns exist about the real economy and the need to avoid choking demand, given a less flexible supply side [11][12] - Political influence may be increasingly impacting the FOMC, making it difficult for Chair Powell to unify the message [9][10][13]