The US Federal Reserve held interest rates steady in Kevin Warsh's first meeting as chairman on Wednesday, while most officials signalled their next move may be a rate increase as inflation fears take hold.
The decision marks the fourth consecutive time the US central bank has held its benchmark target range at 3.50 to 3.75 per cent as it continues to monitor inflationary effects from the conflict. The UAE Central Bank, which follows the Fed's decisions because of the dirham's peg to the dollar, also held its base rate steady at 3.65 per cent.
Confirming its hawkish pivot, nine members on the Fed's rate-setting committee said they expect to raise interest rates at least once this year, against zero in March. An additional nine said they expect either one or no rate cuts.
The new projections show how sour the inflation outlook has become, as rising energy costs due to the Iran war ripple through the economy. Recent data shows that inflation has accelerated since the Iran war began on February 28. US inflation rose 4.2 per cent on an annual basis in May – its highest level in three years – mostly as a result of higher petrol prices. The Fed typically raises interest rates to fight inflation.
Further underscoring the shift was a pared-down post-meeting statement that also removed the Fed's previous easing bias.
"Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East," Mr Warsh said.
Mr Warsh said he did not include his own projections in the Fed's so-called dot plot, which shows where each of the 19 voting and non-voting members of the committee think interest rates will land.
"I can't give any forward guidance about what we're going to do next," he said.
Still, he reaffirmed the US central bank's commitment to price stability. Inflation has remained above the Fed's 2 per cent target for five years.
"This committee will deliver price stability," he said.
During the Fed chair audition process, President Donald Trump made clear that he wanted Jerome Powell's successor to deliver rate cuts. And while he said he wanted Mr Warsh to be independent, he also recently said the Fed should not raise rates despite higher inflation.
"Coming from a guy who interviewed for the job as being a bit more dovish, it seemed as though he's returned to his hawkish roots," said Art Hogan, chief market strategist at B Riley Wealth.
Iran war effects
Mr Warsh did not disclose the Fed's thinking on how significant a factor the Iran war played in the US inflation outlook. Fed officials have previously suggested that sustained higher oil prices, which at one point touched $120 a barrel, would lead to higher inflation and lower growth.
Oil prices have retreated since Mr Trump on Sunday announced a framework peace agreement with Tehran that could reopen the Strait of Hormuz, a vital chokepoint for global energy supplies, with Brent crude trading at about $80 a barrel.
A signing ceremony is expected to be held in Switzerland on Friday.
Still, it could take months to return production to prewar levels, with higher costs passed on to consumers.
And while the peace agreement could reopen traffic in the Strait of Hormuz, the International Monetary Fund's Port Watch tool showed a lack of tanker traffic through the waterway.
“Under these conditions, another rate increase later this year remains a credible possibility,” said Noureldeen Al Hammoury, head of market insights and community engagement at Equiti Group in Dubai.
While Mr Warsh has said AI could help to reduce inflation, data also suggests the costs associated with building data centres are contributing to an inflationary bump, at least in the short term.
Updated forecasts show the Fed anticipates its preferred inflation metric to increase 3.6 per cent on an annual basis this year, compared to its March projection of 2.7 per cent. Stripping away food and energy, the Fed anticipates inflation will come in at 3.3 per cent versus its March forecast of 2.7 per cent.
Mr Warsh's accession has also raised questions over his vision for how the Fed will operate. The new chair has said he wants a reform-orientated central bank with less focus on communications and forward guidance such as the “dot plot”, and is seeking changes to the Fed's balance sheet.
“The main risk is therefore not the interest-rate decision itself, but an unclear communication strategy. A press conference that fails to establish a credible policy direction could increase volatility in Treasury yields, the US dollar and equity markets, even if rates remain unchanged,” Mr Al Hammoury said.
Wednesday also marked a rare moment in which a current and former Fed chair attended a policy meeting. Although he stepped down as chair last month, Jerome Powell has said he intends to continue to serve as one of the Fed's seven governors for a “period of time”, owing to what he called “unprecedented” attempts by the Trump administration to place the central bank's independence in doubt.
Mr Powell had faced a criminal investigation over remarks he made about cost overruns at the Fed headquarters in Washington. The case was dropped after a US judge tossed out the Justice Department's subpoenas.
