President Donald Trump’s second term has been jolted by simultaneous shocks abroad and at home: a rapid escalation of hostilities between the United States, Israel and Iran that has spread across the Gulf, and a judicial rebuke that forces the rollback of much of his signature tariff policy. The two developments are not separate inconveniences; together they threaten to transmit a fresh dose of inflation and market volatility into an already fragile global economy while narrowing the administration’s room for maneuver.
Over the span of just a few days in late February and early March, U.S. and Israeli strikes on Iranian targets were followed by widespread Iranian missile and drone strikes across the region. Tehran reportedly launched salvoes at multiple countries, and the United Arab Emirates’ defence ministry reported Iran fired 165 ballistic missiles and 541 drones at the UAE. Facilities in Abu Dhabi, Saudi Arabia and Oman were hit, an Iranian attack on a hospital and state broadcaster was reported, and Iran said it struck U.S. bases; three U.S. F-15Es reportedly crashed during operations in Kuwait. The breadth of targets and weapons — and Iran’s suggestion the Strait of Hormuz is closed to shipping — have turned a local confrontation into a regional crisis.
The immediate market consequences were swift. A large refinery in Saudi Arabia reduced output after drone strikes, Qatar paused some LNG production, and European gas prices spiked by as much as 50 percent at one point. Shipping lanes around the Strait of Hormuz have become chokepoints: roughly 750 vessels are reported held up around the waterway, including about 100 container ships, leaving an estimated 10 percent of the global container fleet constrained. Labour bodies and insurers have labelled the area a high-risk zone, giving seafarers the contractual right to refuse transit and raising freight and insurance costs.
Economists warn these disruptions could matter for macroeconomic outcomes. PNC’s chief economist has sketched a worst-case scenario in which prolonged closure or severe disruption of Hormuz keeps Brent crude above $100 per barrel for months; that would shave roughly 0.4 percentage points off U.S. real GDP growth in 2026 and lift headline CPI by about 0.5 percentage points. Former Treasury secretary and ex-Fed chair Janet Yellen has echoed the concern: the duration of the Iran conflict will determine how much growth and inflation are affected, complicating Federal Reserve choices between guarding against recession or higher inflation.
At the same time, the U.S. government lost a major legal skirmish over tariffs. On February 20 the Supreme Court ruled 6-3 that the International Emergency Economic Powers Act did not authorize the president to impose tariffs bypassing Congress. That constitutional decision — affirming that tariff and tax authority rests with the legislature — was followed on March 2 by a federal appeals court order that removed a temporary pause and sent the case back to the U.S. Court of International Trade with instructions to proceed immediately. The appellate court rejected the administration’s request for up to four months to arrange alternatives, accelerating the prospect of refunds to importers.
The practical legal question now shifts from principle to process: who will receive refunds, how much, and when. Importers and small businesses that have been carrying sudden tariff bills will press for rapid reimbursement; a large-scale refund program could become an unprecedented drain on federal coffers. The government’s attempt to buy time — by asking for a delay to seek new legal cover or a legislative fix — has been rebuffed, leaving the administration exposed politically and fiscally.
Taken together, the military and legal developments compress the administration’s tactical options. A prolonged Gulf conflict risks entangling the U.S. in a sustained kinetic campaign or forcing a costly drawdown if policymakers choose to prioritise domestic economic stability. At home, the court’s decision curtails a tool the president used as economic leverage, demonstrating how institutional checks can limit an executive’s capacity to respond unilaterally to geopolitical stresses. Markets, allies and adversaries will watch closely for whether Washington opts for escalation or seeks urgent diplomatic, legislative and fiscal remedies.