US Federal Reserve officials will approach this week's two-day policy meeting with questions mounting over the economic fallout of the Iran war and the central bank's leadership transition.
For Jerome Powell, whose term as Fed chairman expires in mid-May, this could be his last time steering the central bank's rate-setting committee. Although the Fed has to contend with the repercussions of the two-month Iran war, it is widely expected to hold interest rates at around 3.6 per cent.
“For the policy decision, Iran matters more because it directly affects inflation, growth, and consumer confidence right now,” said Noureldeen Al Hammoury, chief market strategist at Equiti Group in Dubai.
Major central banks in Japan, Germany, Canada and England are also expected to keep rates steady this week. The UAE Central Bank and most others in the Gulf are also be expected to keep rates steady because of their US dollar currency pegs, with Kuwait, whose dinar is tied to a basket of currencies, potentially the sole exception.
These decisions would mirror the word of caution from the International Monetary Fund, which anticipates the war-driven oil shock to boost inflation and slow economic growth.
Oil prices have surged more than 44 per cent since the US and Israel launched co-ordinated strikes against Iran on February 28, with Tehran responding by launching retaliatory attacks on key infrastructure across the wider Middle East.
Damage to infrastructure and the effective closure of the Strait of Hormuz have constrained exports of oil and refined products from the region.
The war has led oil prices to surge. Brent, the benchmark for two-thirds of the world's oil, settled at $105.30 a barrel last week, while West Texas Intermediate, the gauge that tracks US crude closed at $94.40 per barrel. On a weekly basis, Brent was up more than 16 per cent and WTI jumped about 14 per cent.
The surge in prices since the start of the war has rivalled the 2022 energy shock following Russia's invasion of Ukraine. Latest research from the Dallas Fed anticipates prolonged disruption, under which US crude will peak at $115 a barrel in October, which would push headline inflation beyond 4 per cent this year.
Peter Andersen, founder of Andersen Capital Management, said current oil prices suggest investors remain optimistic of a short-lived conflict. “I'm not so sure about that,” he said.
While the US benefits as the world's top crude exporter, Derek Tang, economist at MPA Macro in Washington, expects the impact of energy shortages to eventually make its way to American shores.
“The US is insulated, but not fully. So you can see the shortages beginning in Asia and they're going to move to Europe, and eventually this corner of the world as well,” he said.
Mr Tang said it was sensible for the Fed to “make the threat of holding here credible so that people will believe them”. Forecasts released in March showed the Fed still expected to cut rates once this year.
Fed leadership transition
With this week's meeting potentially Mr Powell's last at the helm, attention is turning towards Kevin Warsh, who served on the Fed's board of governors during the global financial crisis.
It could be a tight schedule to confirm US President Donald Trump's nominee for the Fed's top job by mid-May. One obstacle was cleared after the Justice Department dropped its criminal investigation into Mr Powell.
Mr Warsh's nomination hearing before the Senate banking committee last week signalled changes are coming. This would include alterations to the Fed's balance sheet policy and a less communicative but still independent Fed, with certain carve-outs.
“Mr Warsh’s hearing clearly put those issues on the table,” Mr Al Hammoury said. Mr Powell has not yet said if he will serve his remaining two years on the board as a governor.
UAE-US swap line
There will also be focus on the Fed this week for any announcements on currency swap lines, which the central bank currently has with six major central banks to “enhance the provision of US dollar liquidity”.
Mr Trump last week said his administration is considering a currency swap line with the UAE after The Wall Street Journal reported the idea was raised in a discussion between the UAE's central governor and Treasury Secretary Scott Bessent during the IMF and World Bank spring meetings.
The Financial Times reported on Thursday that the Fed has not been “formally” consulted about the Treasury secretary's talks with his international counterparts.
Yousef Al Otaiba, Minister of State and the UAE's ambassador to the US, said the UAE has no dollar liquidity problems and trillions of dollars worth of sovereign wealth fund assets. He added that any suggestion that the UAE requires external financial backing “misreads the facts”.
“The UAE is one of the world’s most financially resilient economies, underpinned by more than $2 trillion in sovereign investment assets, more than $300 billion in foreign currency reserves held by the UAE's central bank and a banking sector with approximately $1.5 trillion in deposits,” he said.
Mr Bessent said that dollar swap lines “are part of continuing, routine conversations that [Treasury] has been having with our partners over a number of years”.
