Trump soothed rattled global financial markets yesterday afternoon by suggesting that the conflict in Iran will be over "very soon." But the reality of a more fractured world may not dissipate quite so easily.

The big picture: The geopolitical strains unleashed by the U.S. and Israeli attacks on Iran 11 days ago point to an ongoing reset in the politics and economics of the Middle East — with downstream effects for global inflation, interest rates and more.

• Markets are pricing in a relatively temporary surge in energy prices, but they are just the latest in a series of supply shocks that have been the defining feature of the global economy this decade.
• It creates a particular challenge for the Federal Reserve and other central banks. They must decide whether to try to fight supply-shock-driven inflation — or look through it.

State of play: Bond yields are up since the end of February. The 10-year this morning was 4.12%, up from 3.96% pre-attack.

• It implies that the potential for an inflationary surge is seen as more significant than the flight-to-quality impulse that often drives U.S. bond yields lower in times of geopolitical strife.

Reality check: The moves in yields and inflation expectations have hardly been the stuff of nightmares.

• Longer-term Treasury yields were higher just a few weeks ago and through most of 2025.
• Treasury markets priced in 2.6% annual inflation over the next five years at yesterday's close, up from 2.4% before the attacks but far below the levels seen at the height of the Ukraine invasion four years ago (3.6%).
• Futures markets are now pricing in better-than-even odds (57%) that the Fed will leave interest rates unchanged at its June meeting. A month ago, the CME FedWatch tool put the odds of a rate cut by June at about 75%.

Yes, but: While these markets haven't displayed all-out panic, and U.S. stocks aren't down much, there is reason to think the Fed and other central banks will be reluctant to deliver rate cuts at a moment of elevated inflation.

• Traditional monetary policy theory holds that energy price shocks are one-time events that policymakers should look past.
• But coming after the pandemic supply shocks, the Ukraine war and the U.S.-launched trade war, the world economy is looking more like one in which rolling price shocks are the norm, not the exception.

Between the lines: If confirmed as Fed chair in a timely manner, Kevin Warsh will lead the central bank's June meeting. He will face a knotty tension between trying to deliver the rate cuts he has argued are justified and energy-driven inflation that is likely to reignite between now and then.

What they're saying: "The general tone of central banks will remain hawkish so long as the threat of the war's inflationary implications persist," Thierry Wizman, global FX and rates strategist at Macquarie Group, wrote in a note.

• "We would expect that this more 'hawkish' disposition persists even after hostilities end, largely because the data may continue to point to inflationary pressures," he wrote, and "hence a shift in public expectations."

More groups are lining up to challenge Trump's trade policies.

• Two lawsuits are trying to block the tariffs that Trump imposed to replace those struck down by the Supreme Court. Another is taking aim at Trump-era import taxes on low-value goods.

Why it matters: Each suit is a new test for the administration's go-to economic tool. The tariff regime that's reshaping global trade could end up being litigated piece by piece in federal court.

The big picture: Two small businesses filed a lawsuit yesterday challenging the sweeping 10% tariffs enacted under Section 122, a trade authority that grants tariffs for up to 150 days to address balance-of-payments deficits.

• The companies are being represented by the Liberty Justice Center, the advocacy group that successfully argued against the International Emergency Economic Powers Act tariffs before the Supreme Court.
• "By attempting to stretch Section 122 into a catch‑all tariff power, the administration is once again bypassing Congress and placing the burden of unlawful tariffs on American small businesses and consumers," the group wrote.

Zoom in: Twenty-four Democrat-led state attorneys general filed a lawsuit last week to block Trump's latest tariff regime, similarly arguing that the nation does not face a balance-of-payments issue.

• Any lawsuit is likely to stretch beyond the period during which the Section 122 tariffs are intended to be in effect.
• Trump administration officials say the duties will be wholly replaced under other trade laws — ones that require investigations by the U.S. trade representative and the Commerce Department — by the time the tariffs expire.

The intrigue: The Court of International Trade lifted a pause on a separate court case from a Detroit auto parts manufacturer challenging Trump's authority to end the tariff exemption for imports valued at $800 or less, Bloomberg reported yesterday.

• The Supreme Court decision last month did not fully address the halt to the so-called de minimis exception, which the Trump administration says remains in place.