Economist Justin Wolfers explains why the president's war and trade policies are costing Americans dearly—and why the Federal Reserve's independence is at risk.
Oil at $126: A Symptom of Belligerence
When reports emerged that President Trump was considering ending the ceasefire and launching new strikes in Iran—potentially even deploying ground forces to secure the Strait—the price of oil hit $126 a barrel. That was the highest level since the start of the war, and indeed the highest in four years. It was a stark reminder that the president's instincts, whether on trade or military action, come with a price tag that markets are all too willing to calculate.
Economist Justin Wolfers has been tracking this pattern for months. Every time Trump leans into confrontation, markets tank. Every time he backs off, they recover. The logic is simple: economies work best when nations cooperate, when Washington is boring. But Trump's approach is anything but boring. His trade war was pointless and destructive, hurting allies and enemies alike. Now his Iran policy is repeating the same mistake, with oil markets delivering an unambiguous verdict.
The Market's Verdict on Trump's Instincts
Wolfers points out that the stock market provides a near-perfect laboratory for measuring the economic cost of belligerence. On any given day, the market reflects countless factors. But when the president gives a belligerent speech, the market minutes later is essentially the same economy with a higher chance of war. The drop that follows is the market's direct statement: we are worth less because of American aggression.
This is not about whether the overall market is high or low—that depends on AI, earnings, and a thousand other things. The question is whether the market would be higher without the war. The answer, from every data point, is yes. The pattern holds for oil, for equities, for currencies. Trump's instincts are consistently destructive, and markets are consistently telling us so.
Oil Futures: A Long-Term Scar
The spot price of oil—what you pay at the pump today—is volatile and driven by short-term factors like shipping delays and storage capacity. But the real story is in the futures market, where traders buy and sell oil for delivery months or years ahead. Those futures show that oil prices for 2028 and 2029 remain substantially higher than before the war—perhaps 25% higher, around $70 to $75 a barrel.
That means the damage is not temporary. Even if the Strait reopened tomorrow, the pain would linger. Oil storage on the wrong side of the Strait is full, forcing production shutdowns. Restarting takes time. Ports have been destroyed. Reserves worldwide are depleted. The political will to cooperate is absent. The futures market is pricing in a world that is permanently more expensive, a world where the cost of Trump's belligerence is baked into the economy for years.
The Fed's Supply Shock Dilemma
The war in Iran is what economists call a supply shock: it pushes inflation up and the economy down at the same time. That creates a nightmare for central bankers. Raise rates to fight inflation, and you crush an already weakening economy. Lower rates to support growth, and you risk letting inflation run wild. The conventional wisdom on Wall Street is that the Fed will now hold rates steady, with no cuts for at least a year and a half.
But Wolfers offers a more nuanced view. Textbook economics says that a supply shock like this is transitory. Oil prices jump from a low level to a high level, causing a one-time burst of inflation. Once prices stabilize at the new level, inflation stops. The correct response, according to the textbook, is to "look through" the shock—to ignore it and keep rates where they are, or even cut them if the economy weakens. That would take immense courage, especially when the political pressure from the White House is for lower rates. But it is by no means obvious that rate hikes are coming.
Kevin Walsh and the Threat to Fed Independence
Kevin Walsh, the president's nominee to lead the Federal Reserve, faces a Senate confirmation that has already revealed troubling signs. During his hearing, Walsh could not bring himself to say that Joe Biden won the 2020 election. That refusal dismayed Wolfers, not just as a matter of truth, but as a test of independence. "Independence literally means I will prize the best interest of the American people above hurting the president's feelings," he says. Walsh chose not to hurt the president's feelings.
Wolfers notes that half of Wall Street economists worry Walsh will not be independent. The other half hope he is lying now and will be a true public servant once confirmed. That is a sad state of affairs: the best defense of a nominee is that he is being dishonest. Meanwhile, Jay Powell, the outgoing chair, has decided to stay on as a Fed governor until the White House investigation into him is over. That gives him one piece of leverage: his seat. Powell's vote of confidence in Walsh—he said he thinks Walsh can do the job—offers some reassurance, but the uncertainty remains.
The Danger of Partisan Economics
Wolfers admits that he sometimes catches himself viewing economic events through a partisan lens. When the president does something, he instinctively looks for what is wrong with it before what is right. That is a dangerous habit for an economist. The Federal Reserve itself is now showing signs of the same infection. Dissents over policy decisions are at a 30-year high. Board members appointed from the White House's own economic team parrot talking points rather than offer independent analysis.
The creeping partisanship weakens the entire profession. When economists start thinking in red versus blue rather than in analytic terms, they become dumber. Wolfers's advice to himself—and to others—is to take a deep breath, remember that it is not about the present or about feelings, and try to notice when the partisan trigger is being pulled. It is a hard discipline, but essential if the Fed and the economics profession are to retain any credibility. The alternative is a world where every policy decision is judged by whose team it helps, not by whether it makes the economy stronger.