In a rare display of bipartisan defiance, the US Congress has passed a war powers resolution for the first time in decades, directly challenging President Trump's authority to engage militarily with Iran. The move, which observers are calling a 'fiscal restraint on firepower,' underscores a growing anxiety on Capitol Hill about the cost of conflict in the Middle East.
From my perch in the City, this looks less about diplomacy and more about the bottom line. The resolution, which now heads to the President's desk for an almost certain veto, is a calculated attempt to rein in what many see as an expensive and open-ended military commitment. With the US deficit ballooning, taxpayers are rightly asking: who pays for this? The answer, as always, is the bond market.
Market reaction has been muted so far. The dollar held steady, and gilt yields barely flinched. But make no mistake: this resolution is a shot across the bow of the administration's spending priorities. The irony is thick. The same Congress that just passed a massive spending bill is now trying to cap military costs. That is the sort of cognitive dissonance that makes investors nervous.
The War Powers Act of 1973 was designed to limit executive power after Vietnam. But it has been repeatedly ignored by presidents of both parties. The fact that it is being dusted off now suggests a deep unease about the direction of US foreign policy. And in the markets, uncertainty is a poison.
Let us talk about capital flight. If the US appears politically paralysed or reckless, capital will flee to safe havens. We have already seen a modest uptick in gold and a dip in the S&P 500. This is not panic, but it is prudent repositioning. The real question is whether this resolution will force the administration to de-escalate, or whether it will merely embolden Iran to test American resolve.
On the fiscal side, this could be a boon. Less military spending means a tighter budget, which is what the bond market has been screaming for. But do not hold your breath. Congress has a knack for spending the peace dividend elsewhere. Still, any constraint on the defence budget is welcome news for those of us who believe in fiscal responsibility.
The bottom line: this is a political gamble that could either stabilise or destabilise. The markets are watching, and they will punish any sign of recklessness. For now, I am advising clients to stay liquid and keep a close eye on the 10-year Treasury. It will tell us everything about whether this is a genuine shift or just political theatre.
