U.S.-Iran Conflict Escalates, Fed Policy Outlook Comes Into Focus

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Summary:

Trump said the latest round of U.S. strikes on Iran would not last long; the Beige Book showed that U.S. economic activity increased slightly in recent weeks, while prices rose moderately...

【Highlights】

1. Iran updates its list of vessels violating rules in the Strait of Hormuz

2. Trump says the latest U.S. strikes on Iran will not last long

3. Iran's parliament speaker says the Strait of Hormuz will reopen only after the U.S. fulfills its commitments

4. Yen strengthens as BOJ policymaker says this year marks a major turning point

5. Williams says rising long-term Treasury yields reflect a strong economy rather than inflation concerns

6. Beige Book: U.S. economic activity increased slightly in recent weeks, while prices rose moderately

7. U.S. private-sector employment rose by just 38,000 in August, the smallest increase of the year

8. U.S. July factory orders rose 0.9% month on month, beating expectations

9. Bank of Canada holds rates steady, warns of increased upside risks to inflation

【Details】

Iran Updates List of Vessels Violating Rules in the Strait of Hormuz

On September 2 local time, Iran's Persian Gulf and Strait Administration updated its list of vessels found to be in violation of regulations, adding 11 ships and bringing the total number of listed vessels to 57. Iranian authorities said the vessels had failed to comply with rules governing passage through the Strait of Hormuz. Vessels on the list may face fines, detention, or cargo confiscation when transiting the strait in the future. Iran also warned that other vessels involved in ship-to-ship transfers or similar activities with listed vessels could be added to the list.

In a statement issued on August 23, Iran's Persian Gulf and Strait Administration said vessels violating Iranian navigation regulations in the Strait of Hormuz would face restrictions including fines, detention, or confiscation. The statement advised cargo owners traveling to and from the Persian Gulf to consult the administration's list of "non-compliant vessels" before chartering ships in order to avoid potential problems.

Trump Says Latest U.S. Strikes on Iran Will Not Last Long

U.S. President Donald Trump told reporters at the White House on September 2 local time that the latest U.S. military campaign against Iran would not last long. Trump said the strikes on September 1 had been "very powerful" and that the United States was prepared to launch another strike against Iran at any time.

U.S. Central Command said on social media on September 1 that U.S. forces had completed a new round of strikes against Iranian military targets, including air-defense positions, radar systems, maritime assets and facilities, mine-laying capabilities, and communications sites belonging to Iran's Islamic Revolutionary Guard Corps. The IRGC announced on September 1 that it had begun responding to the U.S. strikes and claimed to have shot down a U.S. MQ-9 drone.

Iran's Parliament Speaker: Hormuz Will Reopen Only After U.S. Fulfills Its Commitments

Iranian Parliament Speaker Mohammad Bagher Ghalibaf said on September 2 local time that Iran would take steps to reopen the Strait of Hormuz only after the United States fulfills its relevant commitments.

Ghalibaf made the remarks during a meeting with officials from Hamas, saying that Iran did not rule out negotiations but regarded them as another tool in its broader struggle. He also said that during discussions over the first article of the U.S.-Iran memorandum of understanding, Iran had demanded an end to the war against Iran and its allies in the so-called resistance front. The 15-point text initially proposed by the other side, however, called for Iran to completely halt its missile, nuclear, and resistance activities.

Ghalibaf stressed that Iran and the resistance front would continue to oppose the United States and Israel.

Yen Strengthens as BOJ Policymaker Calls This Year a Major Turning Point

The dollar fell nearly 1% against the yen on Wednesday, once again encountering resistance around the psychologically important ¥160 level. The move fueled speculation that Japan—or Japan and the United States jointly—could intervene in the foreign-exchange market again.

Meanwhile, Hajime Takata, one of the Bank of Japan's most hawkish policymakers, delivered a stronger signal in favor of further rate hikes. He not only left the door open to larger increases but also indicated that there could be room for consecutive rate hikes. With the BOJ's September policy meeting approaching, expectations for further monetary tightening in Japan have risen significantly.

U.S. Treasury Secretary Scott Bessent has voiced strong support for Japan taking decisive action to address the weak yen. Bessent met with BOJ Governor Kazuo Ueda on the sidelines of the G20 finance ministers' and central bank governors' meeting. According to a U.S. Treasury statement, Bessent strongly supported decisive market and monetary measures by Japan to address what he described as a significantly undervalued yen, noting that a weaker yen would increase domestic inflationary pressures in Japan.

Following Bessent's public pressure, BOJ Governor Ueda faces unusually serious risks of financial-market turbulence as he prepares to make a policy decision this month. Ignoring Bessent's barely concealed call for higher interest rates could catch traders who have heavily positioned for monetary tightening off guard and trigger a sharp decline in the yen. In turn, that could push inflation expectations—which are already approaching 3%—even higher.

Williams: Rising Long-Term Treasury Yields Reflect Strong Economy, Not Inflation Concerns

New York Fed President John Williams said on Wednesday that the rise in long-term bond yields was not driven by concerns about inflation, but rather reflected the strength of the U.S. economy.

Williams also said he was continuing to gather information to help determine the Federal Reserve's next monetary policy decision. Higher borrowing costs—which in theory should weigh on economic activity—would not necessarily determine the Fed's policy choices, while the central bank must fulfill its responsibility to bring inflation down to its 2% target.

Beige Book: U.S. Economic Activity Increased Slightly, Prices Rose Moderately

The Federal Reserve's latest Beige Book showed that U.S. economic activity increased modestly in recent weeks, employment edged higher, and prices rose moderately.

Fed policymakers will combine the Beige Book findings with hard economic data when assessing whether to raise interest rates at their September 15–16 meeting. The overall outlook for the coming months remained optimistic, although confidence varied across industries.

Respondents said rising energy prices, policy developments, and international conflicts had created greater uncertainty, according to the Beige Book. Concerns about inflation were evident, but had not intensified significantly compared with the previous report released in mid-July.

U.S. Private-Sector Employment Rose by Just 38,000 in August, Lowest Increase of the Year

According to data released Wednesday by the ADP Research Institute, U.S. private-sector employment increased modestly in August. Private employers added 38,000 jobs last month, while July's figure was revised up to 46,000 from the previously reported 44,000.

Economists surveyed by the market had expected private-sector employment to increase by 48,000 in August, following the initially reported gain of 44,000 in July.

The data suggest that employers are still hiring, but at a slower pace than in the spring. August's job growth was the weakest increase since the beginning of the year.

U.S. July Factory Orders Rise 0.9% Month on Month, Beating Expectations

The U.S. Census Bureau reported that factory orders increased 0.9% month on month in July, exceeding the market expectation of a 0.6% rise. Part of the increase was driven by a rebound in aircraft demand.

June factory orders were revised to a 0.2% decline, compared with the previously reported 0.3% drop.

During the month, durable goods orders increased 1.1% month on month, in line with the preliminary estimate, following a 0.5% increase in June. Durable goods orders excluding defense equipment rose 1.3%, also matching the preliminary estimate, after increasing 0.3% in June.

Durable goods orders excluding transportation rose 0.4% month on month, also in line with the preliminary estimate, following a 1.1% increase in June.

Bank of Canada Holds Rates Steady, Warns of Increased Upside Risks to Inflation

Following its monetary policy meeting, the Bank of Canada announced that it would keep its policy rate unchanged at 2.25%, in line with market expectations.

Governor Tiff Macklem said that the prolonged conflict involving Iran could keep energy prices elevated for an extended period, increasing upside risks to inflation. He added that the central bank was prepared to adjust monetary policy if necessary.

The Bank of Canada said U.S. tariffs and Canada's retaliatory measures could increase costs, but that the latest U.S. tariffs were unlikely to have a significant impact on the Canadian economy.

The new tariff policies have made the growth outlook more uncertain, while trade threats pose risks to the sustainability of the economic recovery. However, the bank said there was limited evidence that price pressures were becoming more widespread.

The central bank noted that economic and inflation developments remained broadly in line with the projections in its July Monetary Policy Report and that financial conditions had tightened since the July decision.

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