The US-Iran agreement is a first step

The memorandum of understanding signed by the US and Iran last week is an important step forward. After months of open hostilities that have exacted a heavy toll — in both lives and livelihoods — and inflicted significant economic damage worldwide, the memorandum provides a much-needed foundation for diplomacy that could reverse the stagflationary spillovers of the war. Since the war has complicated an already tricky outlook for most countries and companies, the announcement is understandably being celebrated. But as critical as it is, it is only a first step. A true return to global economic stability still depends on whether all the parties involved can move from a framework deal to a lasting agreement. Of course, this uncertainty has not stopped global financial markets from reacting as though normal economic activity had already been restored. Expectations for a reopening of the Strait of Hormuz and a resumption of full-scale energy exports to international markets have triggered a sharp drop in global oil prices; and that, in turn, has boosted equity markets globally, as well as lowering borrowing costs. Moreover, in the initial hours after the agreement’s announcement, portions of the bond market revised down their assumptions about how aggressively central banks would need to hike interest rates, having inferred that the memorandum could lead to an easing of supply-side constraints fueling inflation. But lasting relief for the global economy will depend on how the US and Iran navigate the profound operational complexities that their agreement entails. For economists and a substantial segment of financial markets, it is too early to declare “all clear.” The next few weeks will be dominated by a step-by-step evaluation of whether renewed diplomacy can survive contact with structural realities. Specifically, further clarity is needed on four issues. First, can technical teams from both the US and Iran sort through what US Vice President J.D. Vance has described as “a lot” of yet-to-be-negotiated details? They must not only resolve current outstanding issues but also navigate the inevitable transition from the memorandum of understanding to constructive talks on the fundamental issues that caused the war — not least Iran’s nuclear program and the broader issue of regional security.