Iran’s missiles and drones have downed dozens of US aircraft, damaged or destroyed hundreds of the United States’ buildings at its bases in the Middle East, and drained its inventories of military equipment worth billions of dollars, the Pentagon conceded earlier this week. On Wednesday, Tehran unleashed another unlikely weapon in its war against the US: a maths equation. Iranian Parliament Speaker Mohammad Bagher Ghalibaf, who has also been a lead negotiator during talks between Tehran and Washington at different stages during the past six months, typed out a version of the Taylor equation, a formula used by central banks to determine interest rates, in a post on X loaded with a wartime message.
Early in the war, which was launched by the US and Israel against Iran on February 28, Ghalibaf frequently used financial arguments to mock how the conflict was being conducted by the administration of US President Donald Trump, to point to Iran’s ability to hurt Washington economically unless it changed its approach. But what exactly is Ghalibaf trying to say? What is the Taylor equation, has the Iran war influenced the US interest rate, and does Tehran “set it”, as the parliament speaker has suggested?
The rule is a formula economists use to estimate where a central bank should set interest rates based on inflation and the strength of the economy. Developed by economist John Taylor in the early 1990s, the rule links the US federal funds rate to inflation and the “output gap” – the difference between actual economic output and its potential. Interest rate = inflation + 0.5(output gap) + 0.5(inflation − 2%) + 2%.
This means the recommended interest rate rises when inflation moves above the 2 percent target or when economic output exceeds its potential. It falls when inflation weakens or the economy operates below potential. However, the equation is a benchmark, not a set rule that is strictly followed.
Policymakers at the US Federal Reserve weigh other economic factors when setting interest rates. Trump’s tariffs, the energy shock following the US-Israeli war with Iran, and heavy investment associated with the artificial intelligence boom, taken together, have kept inflationary pressures strong, experts say. On Wednesday, when the US Federal Reserve raised interest rates by 25bp, it was the first increase in three years.
Fed Chairman Kevin Warsh, in his speech following the rate hike, said renewed fighting between the US and Iran, which has pushed up petrol prices, helped convince Fed officials to support higher rates. IG Group’s Beauchamp said, “The Iran war, indirectly, is a huge driver of last night’s hike, though no one wants to admit it.” “The energy spike has combined with the rise in yields to drive the Fed into a corner with no way out,” he said. Susannah Streeter, chief investment strategist at the Wealth Club, said there is “no denying” that Iran’s retaliatory action against the US and its allies across the Gulf region has “intensified concerns about energy supplies and led to hotter inflation forecasts”.
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