The US Federal Reserve held interest rates steady in a split decision on Wednesday, as renewed tensions in the Iran war add to fresh inflationary pressures.
The decision, which kept the Fed's benchmark rate unchanged between 3.50 and 3.75 per cent, comes as rising oil prices and a new round of tariffs threaten to ramp up consumer prices. Three of the rate-setting committee's 12 members dissented in favour of a quarter-point rate increase.
"Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East," the Fed said in a statement.
The UAE Central Bank, whose policy decisions follow the Fed because of the dirham's peg to the dollar, maintained its base rate at 3.65 per cent.
Fed officials entered this week with economic indicators suggesting the US central bank would leave interest rates unchanged. Headline inflation fell 0.4 per cent on a monthly basis in June, while the labour market has held up.
However these are backwards-looking signals, and surging oil prices from the Iran war threaten to push inflation further away from the Fed's long-term 2 per cent target.
Brent crude prices rose more than 7 per cent, with Brent crude prices eclipsing $90 per barrel after attacks resumed in the Middle East, ending days of relative calm in the region. At the same time, traffic in the Bab Al Mandeb strait has more than halved since the Houthi rebels in Yemen announced a so-called maritime embargo on Saudi shipping, while transits through the Strait of Hormuz remain depressed, IMF Port Watch data showed.
Rising oil prices pushed petrol costs back above $4 a gallon in the US, with the average consumer paying $4.09 per gallon, compared to last month's average of $3.86 a gallon, according to automotive group AAA. Those effects could have inflationary consequences elsewhere, leading to higher operating expenses for businesses who might then cut back on spending and hiring.
Faced with these inflation pressures, investors are ramping up their bets on rate increases later this year. Markets saw a 56 per cent chance of a quarter-point hike in September before Wednesday's decision, CME Group data showed.
The Fed is facing inflation threats on multiple fronts. US President Donald Trump announced a new baseline 10 per cent tariff last week, while the AI buildout is contributing to higher electricity costs.
This leads to questions over whether the Fed is in a position to determine if these pressures will lead to meaningful higher inflation, or if the US central bank can remain on the sidelines amid multiple one-time shocks.
“The Federal Reserve left interest rates unchanged and delivered its clearest signal yet that upside risks to inflation now outweigh downside risks to employment in Kevin Warsh's second meeting as chair,” Karl Schamotta, chief market strategist at Corpay, wrote in a note.
