Iran's path forward

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0:32Good morning from the Financial Times. Today is Wednesday, June 25th, and this is your FT News Briefing. U.S. stocks seem to be impervious to the Iran-Israel conflict, and there's a bit of a rift going on at the Federal Reserve. Plus, lawmakers from U.S. states want to take a page out of the book of EU climate policy. I'm Mark Filippino, and here's the news you need to start your day.

1:03U.S. stocks nearly hit a record yesterday. The S &P 500 ended the day up a little bit more than 1%, while the Nasdaq composite was around 1.5 % higher. The last time indices were up that high was in February, before U.S. President Donald Trump announced his tariff policies. Tuesday's highs were thanks to declining oil prices and hopes from investors that the conflict in the Middle East might be cooling off. But maybe investors should take that with a grain of salt. Because yesterday, Israel said, quote, the battle with Iran has not reached its end yet.

1:41The Iranian regime is facing its gravest threat in years. It's been weakened by sanctions, bombed by both Israel and the U.S., and its proxy militias are in tatters. The stakes for the Islamic Republic are existential.

1:55Vali Nasr: And yet... I don't see it actually changing course. I don't see it as a moment where Iran is going to come out of this conflict and say, we're going to make a 360-degree turn. Vali Nasser is a professor of Middle East Studies and International Affairs at Johns Hopkins University. He recently spoke with our colleague Gideon Rockman about the path forward for the regime. So still the operative strategic culture in Tehran is the same one that has been there before this war and before October 7th. That strategic culture has been going strong since the Iranian revolution in 1979. I think the grand strategy is still there.

2:34Vali Nasr: That's the mindset that's driving Iran's leadership. That's the mindset through which they are making decisions. They have suffered tactical and strategic setbacks. But I think the fundamental assumptions they have about Iran's prerogatives, maintaining the country's independence, the threats that it faces are still there. I mean, the threat that Iran still faces is America and now Israel, which is the same threats that it identified in 1979 as the primary threats to Iran, and it built its whole regional and international policy around how to ward off that threat. Iran's security plan had, in part, meant supporting a number of militant proxy groups in the region, including Hezbollah in Lebanon, Hamas in Gaza, and the Houthis in Yemen.

3:18But Nasser says Hamas' October 7th attack on Israel changed the calculus for Iran.

3:23Vali Nasr: The reason that Israel did not carry the kind of attacks that it's doing today, let's say in 2003, 2006, 2011 onwards, was because of Hezbollah. But then the strategy no longer works with the Israel that has emerged from Gaza war, which is much more risk-taking. It no longer is intimidated by a prospect of Hezbollah retaliation, etc. And an Israel that had planned over a long period of time about how to destroy Hezbollah and how to penetrate and try to destroy Iran as well. So they admit that they're not going to go back to the proxies. That strategy doesn't work. It does not protect Iran anymore.

4:02And the revolutionary spirit that has largely driven the Iranian regime since 1979 doesn't really speak to the people anymore.

4:10Vali Nasr: The greatest vulnerability here right now is the population who's tired of isolation, is tired of the strategies that invite economic and international isolation, and is no longer willing to pay the cost. So I think what we might see is that this regime will try to build bridges with its population. Some elements of this started already, like after the protest over hijab last year, they have largely given up on its enforcement. So basically re-winning the population around nationalism, not around Islam, not around Islamic ideology, but nationalism, I think is a big part of this. And so it's not only missiles, drones, proxies, or nuclear program.

4:54Vali Nasr: I think they know that they're isolated from their people and they cannot fight a regional battle with Israel in that circumstance. That was Professor Vali Nasser. You can listen to his full interview on the most recent episode of the FT's Rockman Review podcast. We'll have a link to that in the show notes.

5:16Federal Reserve Chair Jay Powell testified before U.S. Congress yesterday, and he took a moment to set the record straight about the central bank's stance on monetary policy. Powell signaled that interest rate cuts are off the table this summer, but two Fed board members have recently indicated that they'd back a rate cut at next month's meeting. The two members say recent inflation numbers suggest that Donald Trump's tariffs won't have as much impact on prices as people fear, especially because May's figure actually came in lower than expected. But Powell pushed back against that idea during yesterday's hearing.

5:53He believes the central bank will start seeing the tariffs' impact on prices in the June and the July figures.

6:05U.S. states are heading up the European Union for advice on climate policy. Delegations have met with officials in Brussels in recent weeks, even though the Trump administration is rolling back green initiatives. Here to talk to me about this is the FT's EU correspondent, Alice Hancock. So Alice, shed some light on this for me. Who exactly is meeting with these EU officials and what are they hoping to learn? So there have been several delegations from U.S. states, such as New York State, Washington State, that have been over to visit the European Commission's Climate Directorate. Largely, the groups have been from Democrat states, but they have been bipartisan groups of lawmakers, I'm told.

6:48And there's also been a private sector delegation from Texas, which, of course, we all associate traditionally with being, A, Republican, and B, very heavy on fossil fuels. But, in fact, it has an even higher level of renewable energy now than California, And so there's a lot of interest from them to see what Europe is doing because Europe has sort of been a trailblazer in terms of climate policy. Yeah, so can you explain what exactly they're after? What does Texas want to learn from the EU? Yeah, so the European Union was one of the first regions to set up carbon pricing models, quote, emissions trading system, whereby heavy emitters, industries, so on, will pay a certain amount to emit one ton of carbon.

7:35So it's a market-based model that is meant to slowly kind of incentivize a reduction in emissions over time. And because it's a market-based model, it's quite a popular way of trying to encourage emissions reduction without being too tough on industry at a time when the geopolitics and trade and so on is already tough enough. So the EU has a lot of experience in carbon pricing. Are U.S. delegates looking to enact similar policies of their own? I don't think they're necessarily looking to enact regulation in the way the EU has, but they are specifically very interested in these carbon pricing ideas.

8:12More countries around the world are looking at introducing their own carbon border taxes, also emulating the EU by which foreign importers will have to pay for the carbon emissions embedded in their imports. So in order to avoid that, if you've already paid for the carbon in your area of home production, you wouldn't have to pay the tax at the border. So these carbon pricing models are looking more and more attractive all over the place. Got it. And like I said, this is happening while the Trump administration takes a very different approach to climate policies? Yeah, I think a very different approach is quite an understatement.

8:46They've had an almost sea change from the Biden administration, which has been the most ambitious, I think, U.S. administration on climate policy, introducing the Inflation Reduction Act, which is a huge package of tax credits and incentives to get industry to go green. Trump, of course, on the other hand, has famously called climate change a, quote, hoax and has pledged to drill baby drill lots of fossil fuels. He's rolling back parts of the Inflation Reduction Act tax credits and has pulled the U.S. out of the Paris Agreement. So it's an extremely different vibe there in the U.S. now. Yeah, but meanwhile, U.S.

9:19states, they want to pursue this climate action. Yeah, there are more and more states that see the importance of decarbonizing and see fossil fuels and return to fossil fuels as a kind of regressive step. So there's a group of states called the RGGI states, which stands for the Regional Greenhouse Gas Initiative, which is on the eastern seaboard. They are trying to join together to do more to reduce CO2 emissions. There's states like Oregon who are looking at carbon pricing models. And even some of the Republican states who have really benefited from some of the Inflation Reduction Act credits are also looking to try and hang on to those because it's a way to keep jobs, modernize industry, and so on.

9:58So Alice, do you think this gives hope to people who are interested in pushing climate policies forward? I think it does. I was recently speaking to the director of one of the big climate NGOs who attends all the international climate meetings, and she was saying there is more and more effort to try and get more local governments to push harder on climate change. She said, you know, in the context of London Climate Week, which is on at the moment, in the context of COP30, which is coming up in Brazil this year, there are more efforts to involve, say, mayors, state governments, and so on, because they're the ones that really have to deal with the impacts of climate change on their citizens when there are forest fires, floods, and so on.

10:35And so they see the real-time benefit of trying to pursue climate policies. That's FTEU correspondent Alice Hancock. You can read more on all these stories for free when you click the links on our show notes. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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