The US Federal Reserve held interest rates steady on Wednesday as rising oil prices due to the Iran war added to growing concerns over the inflation outlook.
It marked the third consecutive meeting in which the US central bank has left rates within the range of 3.5 to 3.75 per cent. The Central Bank of the UAE, which follows Fed decisions because of the country's peg to the US dollar, also kept its base rate unchanged at 3.65 per cent.
"Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook," the Fed said in a statement.
Fed officials have indicated that rates could remain on hold for some time amid an assessment of the economic fallout from the conflict, and as negotiations for a permanent end to the war remain stalled.
Oil prices climbed on Wednesday as President Donald Trump warned the US Navy could extend its blockade of the Strait of Hormuz. Brent crude was once again nearing $120 a barrel after increasing more than 7 per cent, while US crude also surged past 7 per cent to $107 a barrel.
While the US has mostly been insulated from a global fuel shortage, its economy has begun to feel the effects of a surge in oil prices, which have risen by about 50 per cent since February 28.
Americans are paying higher prices for petrol, airline tickets and shipping fees. Meanwhile, a sharp rise in fertiliser prices is raising fears grocery bills could be the next to climb.
A recent report showed headline inflation for March had surged to its highest point in two years on an annual basis, after it gained at its fastest monthly pace in almost four years. Separate data has also pointed towards declining consumer sentiment.
The war has fundamentally changed the Fed's calculus for this year, after it said in March that it still expected to deliver one 25 basis point cut in 2026. Fed chair Jerome Powell at the time advised taking the projections with a large grain of salt.
Traders anticipate the Fed to remain on hold until next year, while a small subset expect the committee's next move to be a rate increase, data from the CME Group showed.
Economists warn that a prolonged conflict will raise inflation and dampen growth, with rising oil prices expected to force companies to cut back on spending. That would weigh on the Fed's outlook on the labour market, which Mr Powell has previously described as a “zero-employment growth equilibrium”.
The latest meeting also comes amid a transition in the Fed's leadership. This week's gathering was Mr Powell's last as Fed chair. Former Fed governor Kevin Warsh, US President Donald Trump's nominee to replace Mr Powell at the helm, cleared a key hurdle in his confirmation process on Wednesday when the Senate banking committee voted 13-11 in favour of advancing his nomination.
His nomination now goes to the Senate, where a simple majority is needed for confirmation.
Mr Powell can still serve the remaining two years of his term as a Federal Reserve governor, which expires in 2028. He has not yet publicly said whether he will do so.
