After a massive build-up of military resources in the Middle East in recent weeks and just two days after Oman's foreign minister announced a diplomatic "breakthrough" in Geneva, the U.S. and Israeli military launched a joint strike operation on targets in Iran (Operations Epic Fury and Roaring Lion). The goal is to eliminate Iran's leadership and spark “regime change.”¹ 

In response, Iran launched missiles and drones at Jordan, Bahrain, the UAE, Qatar, Kuwait, Saudi Arabia, and Israel, while threatening to curtail traffic in the Strait of Hormuz. Second-order and proxy responses may also follow. 

As with any geopolitical event, there is a lot of uncertainty, and events are fast-moving. But here are a few initial points from a macro perspective as of Saturday evening:

First, the primary avenue for macro contagion would be oil supply bottlenecks in the Strait of Hormuz. Global oil supply is approximately 107 million barrels per day (bpd), of which about 20% passes through the Strait of Hormuz (see Figure 1).² While Iran itself supplies only ~3 million bpd, about 1.5 million bpd transits through the Strait of Hormuz, representing approximately 7% of the Strait’s daily transit volume. While some of the oil transiting through the Strait could be diverted via pipeline, there is limited bypass capacity (~2.6 million bpd via Saudi and UAE pipelines, see Figure 1 again).³

The tail risk is that about 17.5 million of the supply will be constrained for an unknown period. The initial economic impact will not be felt evenly: Only 2% of Hormuz crude goes to the U.S., accounting for ~7% of total U.S. imports, while 89% goes to Asia—namely China, India, Japan, and South Korea (see Figure 2).

The International Monetary Fund (IMF) PortWatch satellite tracking showed approximately 104 ships per day transiting Hormuz as of February 22nd, 58 of them tankers, both above the level seen on February 22, 2025 (see Figure 3). Iran has threatened Hormuz closure before, but never followed through. Vessel tracking will be the real-time signal of whether this time is different—not headlines, not rhetoric, or X feeds. 

Second, geopolitical events tend to have short-lived market impacts. Oil’s (Brent) spot price surged nearly 7% by Monday midday. But historically, oil price moves driven by geopolitical events have tended to be short-lived episodes (see Figure 4). 

Similarly, risk assets respond more to business cycle dynamics than to geopolitical events, with most geopolitical strife presenting a buying opportunity (see Figure 5). Timing the “buy the dip” trade is difficult, but historically the S&P 500 reaches a trough in a median of 15 days—absent an escalation.

Case in point: Bitcoin, the only major risk asset trading over the weekend, sold off sharply on the news before recovering within hours (see Figure 6).

Third, geopolitics incites volatility in equities more than in bonds. During historical episodes characterized by geopolitical threats or conflict, stock market volatility spikes far more than bond volatility (see Figure 7). 

Bonds, especially Treasuries, catch a flight-to-safety bid, which is what we’ve experienced in recent days. In fact, Treasury yields have fallen or remained tame in 11 of the last 12 geopolitical shocks, with the 2022 Russian invasion being the exception, a period that coincided with a historic inflation spike and aggressive central bank rate hikes (see Figure 8).

Fourth, it would require a fundamental shift in energy prices to alter our macro view. A spike in oil prices in the coming days is not sufficient to change our outlook for inflation moderation this year. The passthrough from oil prices to core inflation has collapsed since the 1970s (see Figure 9). Even the 2022 oil spike following Russia's invasion of Ukraine added only ~0.3 percentage points to core PCE.⁴ 

Research also documented this structural break across industrialized economies, attributing it to the declining share of energy in total output, more flexible labor markets, and improved monetary policy credibility.⁵ For the U.S., evolving into the world’s largest oil producer further mitigates risks. Importantly, when oil shocks did cause recessions historically, it was often because the Fed overtightened in response, not because of the oil shock itself.⁶ The Fed has internalized that lesson. Today, the FOMC is unlikely to hike rates amid a geopolitical oil spike, unlike policymakers in the 1970s. A short-lived energy price spike is a growth risk at the margin, not a regime change.

The bottom line is that potential “regime change” for Iran does not necessarily imply “regime change” for macro and markets. Geopolitical events tend to have sharp but short-lived impacts on financial markets, often presenting buying opportunities. The exception would be the tail risk of a geopolitical chokepoint creating a sustained energy price spike. However, we would view that tail scenario as a downside risk to growth rather than an inflation story. 

Regime change? Not for macro and markets.

Working weekends, 

The Payden Economics Team

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Endnotes

1.  President Trump described the campaign as aimed at regime change in Iran (Washington Post, Feb. 28, 2026).

2. Global oil supply includes ~76 million bpd of crude oil and condensate, and ~31 million bpd of other petroleum products.

3.  U.S. Energy Information Administration. (2025, June 16). Amid regional conflict, the Strait of Hormuz remains a critical chokepoint for oil trade. U.S. Energy Information Administration. https://www.eia.gov/todayinenergy/detail.php?id=65504 

4.  Kilian, L. and X. Zhou (2022). "The Impact of Rising Oil Prices on U.S. Inflation and Inflation Expectations in 2020–23." Energy Economics, 113, 106228.

5.  Blanchard, O.J. and J. Galí (2007). "The Macroeconomic Effects of Oil Shocks: Why Are the 2000s So Different from the 1970s?" NBER Working Paper 13368.

6.  Bernanke, B.S., M. Gertler, and M.W. Watson (1997). "Systematic Monetary Policy and the Effects of Oil Price Shocks." Brookings Papers on Economic Activity, 1, 91–142.