15 April 2026: The FSB Chair warns of rising financial risks stemming from the conflict in the Middle East

As if to rub salt in Rachel Reeves’ wounds, the IMF again downgraded its forecast for the UK economy yesterday. In a review published to coincide with its Spring meeting in Washington, it said that if the conflict in Iran continues longer than currently expected, it may well lead to a global recession.

Speaking specifically about the UK, the Fund’s Chief Economist told Central Bankers and Finance Ministers that the country is likely to be the most affected by the downturn. Specifically, the fund expects weaker GDP growth, higher inflation, and slower job creation.

Economic growth in the UK, as measured by GDP, is now forecast to reach just 0.8% in 2026, down from the 1.3% the IMF predicted before the war began. This 0.5% growth downgrade is the largest among the G7, a group of seven rich nations of which the UK is a member. Every G7 country has had its growth forecast cut by the IMF in its latest update, except Japan, which has been labelled as “stable”. This is ironic given Japan’s total dependence on imported oil, most of which travels through the Strait of Hormuz.

Bank of England Governor Andrew Bailey, in his role as Chairman of the Financial Stability Board, warned of a stability "triple whammy" as funding conditions tighten. The global financial system has so far absorbed the economic shock caused by the war in Iran, partly thanks to post-2008 crisis reforms. Still, rising funding costs may exacerbate stress in other parts of the system, Bailey warned.

He spoke of a potential “double or triple whammy” if tighter funding conditions cause multiple vulnerabilities to crystallise simultaneously, including stretched asset valuations, non-bank leverage, and private credit stress. He was writing to members ahead of the International Monetary Fund meeting of global policy leaders in Washington this week.

He warned that a trigger for financial turmoil could be financial markets pricing in a much larger impact on global economic growth. In that scenario, abrupt re-pricing of equities could coincide with the already greater focus on valuations in private assets, he wrote.

Despite the uncertainty, banks have remained resilient, reflecting the strength of post-global financial crisis reforms and underscoring the importance of implementing the Basel III capital rules.

Meanwhile, Megan Greene, an external member of the BoE’s Monetary Policy Committee, told MPs yesterday that UK economic activity was weak before the war in Iran, but that the war's impact is also inflationary.

She said, “UK activity was already pretty weak before the Iran war, but at the same time, the war's impact is inflationary. I am not convinced that the impact of negative supply shocks has worn off, and, to my mind, the inflationary component of this is really important. We won't have definitive evidence of second-round effects for a while; it could take months. Yet we can't just look through negative supply shocks; the view needs to be more nuanced.”

Financial Markets are becoming increasingly confused about the effects of developments in the Middle East. Traders are simply unsure about the effect of every headline they read, and are unwilling to commit to any long or even medium-term view of the market.

Yesterday, the pound rallied again, reaching a high of 1.3590 and closing at 1.3567. While this suggests that risk appetite is improving, it may also reflect investors' concerns about the U.S. economy.

A new confrontation between the Trump administration and the Federal Reserve may be taking shape over a simple question: Who runs the Federal Reserve after May 15?

That’s the date Jerome Powell’s term as Fed chair expires.

If Kevin Warsh, President Donald Trump’s nominee to replace him, hasn’t been confirmed by the Senate by then, Powell has said he plans to remain as the acting Chair of the FOMC.

“That is what the law requires; that’s what we’ve done on several occasions, including involving me; and that’s what we’re going to do in this situation,” Powell told reporters last month. Powell’s term as one of seven Fed Governors runs through early 2028, allowing him to remain on the Fed’s Board of Governors after his Chairmanship ends.

Many economists and Fed watchers aren’t so sure the White House, or more particularly Donald Trump, will accept Powell continuing to serve as acting Fed Chair. They expect the administration to argue that the President, not the Fed, has the legal authority to elevate an acting chair, a view that directly clashes with the Fed’s reading of the law.

Any prolonged dispute over who runs the institution could exacerbate market volatility at an already unsettled moment for the economy, and it would be just the latest in the White House’s series of attacks on the Fed.

A White House official declined to address the question directly, saying only that “we continue to have productive conversations with the Senate about Kevin Warsh, and we remain confident in his timely confirmation.”

Several FOMC members spoke and offered comments on the economy yesterday.

Chicago Fed President Austan Goolsbee said in a TV interview, “The longer the war goes on, the more a rate cut gets pushed off”. While businesses continue to act as if high oil prices will prove only a short-term disruption, there is little evidence yet that they have caused consumers to pull back on spending or shifted public inflation expectations in a worrisome way, according to Richmond Federal Reserve Bank President Tom Barkin.

A less frequent speaker, Fed Governor Michael Barr, told reporters that the U.S. Federal Reserve may need to keep interest rates steady "for some time" before further cuts are warranted, noting that inflation remains above the Fed's 2% target and that the ongoing conflict in the Middle East poses further risks.

The ​job market "appears to be stabilising," Barr said in ​remarks prepared for delivery to a community podcast.

Finally, Federal Reserve Bank of Boston President Susan Collins agreed that interest rates are likely to stay unchanged “for some time” as recent economic data shows an improvement in the labour market, while risks to inflation remain.

The labour market is showing “at least some more signs of an unusual kind of stability,” Collins said during a panel discussion hosted by the Boston Fed. She also pointed to the need for more evidence that inflation is coming down toward 2%.

“I think that it’s quite likely that it will be appropriate to hold the current range for some time,” she said. “After 175 basis points of easing over the past year and a half, we are at mildly restrictive, perhaps quite close to neutral already,” Collins said, referencing the level at which interest rates neither stimulate nor restrain the economy.

Amid signs of weakness in the labour market, Fed officials lowered rates by a percentage point in late 2024, and by another three-quarters of a point in the closing months of 2025.

Policymakers held rates steady last month, and a surprise fall in the unemployment rate in January may allow officials to do the same in March.

Several Fed officials, including some who had advocated for rate cuts, have recently said employment risks have diminished. Others have voiced concerns about continued price pressures as inflation remains above the Fed’s 2% goal.

As the blockades in the Strait of Hormuz begin to take effect, Treasury Secretary Scott Bessent chimed in that "a small bit of economic pain" is worthwhile for long-term international security. This has simply added to the market’s uncertainty, leading to further dollar weakness.

The index fell to a low of 97.97 yesterday and closed at 98.10.

European Central Bank President Christine Lagarde, speaking at the IMF in Washington, said she would not leave her post early as the global economy faces a severe storm, insisting: “This captain is not going to leave the ship.”

Earlier this year, media reports emerged that Lagarde might step down before the end of her term in October 2027. She had already sought to downplay the claims.

But with the Eurozone hit hard by the energy shock from the war in Iran, she issued a firmer denial.

“When there are big clouds on the horizon, the captain does not leave the ship,” she told Bloomberg TV.

“When you see major disruptions, the energy supply being reduced, when you see threats to growth, upside risks to inflation, these are serious matters that we have to be attentive to,” she said.

The Financial Times previously reported that by departing early, Lagarde would give the French and German leaders a chance to determine her replacement ahead of French elections.

France’s far-right, Eurosceptic National Rally is seen as having a significant chance of winning power in the polls.

The outbreak of the US-Israeli war against Iran, which has sent oil and gas prices soaring, is a major burden for the Eurozone, which relies on energy imports. Economists have downgraded their growth forecasts for the region.

Analysts have raised their bets on the ECB hiking interest rates as soon as this month to keep inflation in check, although Lagarde would not be drawn on what decision the Central Bank’s Governing Committee might make.

Lagarde also welcomed the victory in Hungary’s weekend elections of pro-European politician Peter Magyar, who defeated nationalist leader Viktor Orban, and signs that he is keen on Hungary adopting the euro.

“I’m delighted that he’s looking at it with a very positive approach,” Lagarde said, while stressing that the process of joining the single currency could take some time.

“Growth is now seen slowing to 1.1% this year, down from earlier projections, as the war offsets recent economic gains,” the IMF said in its revised World Economic Outlook.

The report said economic expansion in the euro zone is expected to decline from 1.4% in 2025 to 1.1% this year, below the earlier 1.3% forecast.

It also warned that inflation is likely to increase, which may push the European Central Bank to raise interest rates.

The IMF noted that the Eurozone remains particularly vulnerable due to its heavy reliance on energy imports.

The impact has been further intensified as Europe is still dealing with the effects of Russia’s war in Ukraine, which has already disrupted access to key energy resources.

The war's impact will add to the lingering effects of the persistent rise in energy prices since Russia’s invasion of Ukraine, dragging on manufacturing, with additional pressure from the real appreciation of the euro relative to the currencies of countries exporting similar products.

Still, the IMF is more optimistic than the ECB, which predicted 0.9% growth under its own baseline last month, before a quick pick-up in 2027.

The confusion in global financial markets has again seen the Euro appreciate, which may help in the fight against inflation, but possibly not materially, as was seen last year.

Yesterday, the common currency rallied to a high of 1.1811, closing at 1.1795.

Have a great day!