Dr. Doom Nouriel Roubini: Trump is highly likely to "escalate the Iran war"! The inflation rebound could force the Federal Reserve and the European Central Bank to raise interest rates.

The well-known economist Nouriel Roubini, dubbed “Dr. Doom,” recently warned that U.S. President Donald Trump may very well choose to escalate the war in Iran rather than back down in order to secure victory. He pointed out that if the U.S.-Iran conflict further deteriorates, it could lead to a repeat of the 1970s oil crisis, forcing the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) to restart interest rate hikes amid inflationary pressures.
(Background: Reuters: U.S. intelligence confirms “only one-third of Iran’s missiles destroyed,” large arsenal still poses a threat?)
(Background information: WSJ: Current likelihood of a successful U.S.-Iran ceasefire remains low, 15-point plan rejected, Iran refuses to allow nuclear weapons and missiles)

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• Trump and Israel have strong motives to “escalate war”
• Tail risk: The 1970s oil crisis may repeat
• Inflation monster strikes back, Fed and ECB may be forced to raise interest rates

As the conflict in the Middle East continues to rage, the global economy is facing severe inflation and growth challenges. Nouriel Roubini, who accurately predicted the 2008 global financial crisis and is known as “Dr. Doom,” recently issued a new warning regarding the future direction of the U.S.-Iran conflict and its economic impact at an economic and business leaders seminar held at Lake Como in Italy.

Trump and Israel have strong motives to “escalate war”

In an interview, Roubini clearly stated that President Trump is more likely to choose to escalate this war against Iran in order to secure victory, even though it would have more severe consequences for the global economy and international order. Roubini said:

“My baseline forecast is that the probability of escalation is over 50%.”

Despite this, Roubini also offered a relatively optimistic view on the war. He analyzed that if the U.S. and Israel choose to escalate the conflict, it could lead to the collapse of the Iranian regime; this means that even if oil prices spike in the short term, better outcomes could be achieved in the medium to long term. Therefore, he believes that both Trump and Israeli Prime Minister Benjamin Netanyahu have strong motives to escalate the conflict and seek a comprehensive victory.

In fact, just as Roubini made the above statements, Iran and Israel continued to exchange missile fire on Friday, with Tehran authorities even expanding their attack targets to multiple Gulf countries. Just hours earlier, Trump had extended the deadline for Iran to agree to reopen the Strait of Hormuz, threatening to attack its power facilities otherwise.

Tail risk: The 1970s oil crisis may repeat

On the economic front, Roubini warned that the continuation of war will inevitably harm the global economy. He specifically pointed out a “tail risk”: if the U.S. and Israel escalate their offensive, leading Iran to increase its attacks on regional oil facilities, the world could be plunged into a situation reminiscent of the 1970s oil crisis.

Currently, U.S. military actions against Iran have prompted several countries to lower their output forecasts and prepare for an energy-driven inflation backlash. Roubini bluntly stated, “Even if the war ends tomorrow, oil prices will not return to pre-war levels.” However, he added that if oil prices only rise by 10% to 15%, it would “not be a tragedy” for the global economy.

Inflation monster strikes back, Fed and ECB may be forced to raise interest rates

As oil and gas costs rise and market sentiment indicators plummet, countries like Germany and Italy are reassessing economic growth, and the ECB released a more pessimistic regional economic outlook last week.

When asked about the impact on monetary policy, Roubini anticipated that the ECB might have to start raising interest rates in “April, or even June,” with the Bank of England (BOE) likely to follow suit. More concerning is the direction of U.S. monetary policy. Roubini stated that the Federal Reserve may also find itself in a dilemma. To avoid the risk of “inflation expectations becoming unanchored,” decision-makers may be forced to restart the interest rate hike cycle.

Roubini recalled that the Fed nearly lost its credibility in 2022 due to slow interest rate hikes. He specifically mentioned that Kevin Warsh, who is set to replace Jerome Powell as Fed Chair in May this year, would absolutely not allow his reputation to be tarnished early in his term. Therefore, in the face of inflationary pressures brought about by war, this new chair may have no choice but to raise interest rates.