The US Federal Reserve held interest rates steady in a split decision on Wednesday, as long-term yields indicated concern that the central bank is falling behind on inflation.
The decision, which kept the Fed's benchmark rate unchanged at between 3.50 and 3.75 per cent, comes as rising oil prices and a new round of tariffs threaten to increase consumer prices. Three of the rate-setting committee's 12 members dissented in favour of a quarter-point rate increase.
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 chairman Kevin Warsh told reporters that he remained committed to price stability, despite inflation remaining above the regulator's 2 per cent target for more than five years.
"That's hard to shake that the Fed's implicit inflation target was somehow above 2 per cent. Let me reiterate: there is no soft inflation target," he said.
The message did not resonate with markets. The 10-year Treasury yield jumped seven basis points to 4.67 per cent, while yields on the 30-year Treasury climbed 10 basis points to 5.2 per cent, its highest reading since 2007.
The Dow closed down 1,153.18 points, or 2.19 per cent, in its worst decline since April 2025. The Nasdaq Composite slid into correction territory while the S&P 500 fell 1.52 per cent.
"The bond market is telling you that they're more concerned about inflation than the Fed is in the here and now," said Art Hogan, chief market strategist at B Riley Wealth.
The Fed entered this week's meeting facing rising inflation pressures over escalating tensions in the Iran war, surging oil prices and rising costs associated with building artificial intelligence infrastructure.
Mr Warsh again declined to provide forward guidance, which indicates to markets which way the Fed might move on policy. Markets had priced in odds of about two-thirds that the Fed would hold rates steady this week, showing traders were unusually uncertain about the outcome.
"Surprise is not the objective function. Surprise is not what we're solving for," he said.
Brent crude prices rose more than 7 per cent before the Fed's decision on Wednesday, with Brent crude prices passing $90 a 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 a gallon ($1.06 a litre), compared to last month's average of $3.86 a gallon, according to automotive group the 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 increasing their bets on rate increases later this year. Markets saw a 56 per cent chance of a quarter-point rise in September before Wednesday's decision, CME Group data showed.
"Market judgments have moved up on what nominal rates are across the Treasury curve. That doesn't mean we take them as by dictation but we're observing them," Mr Warsh said.
He appeared to be on the back foot during his post-meeting media conference. When pressed on why the Fed held steady, he said there was "nothing inertial" about discussions and rejected suggestions that the central bank was on pause.
"I think the answers to questions were insulting," Mr Hogan said.
The Fed is facing inflation threats on several fronts. US President Donald Trump announced a new baseline 10 per cent tariff last week, while AI building is contributing to higher electricity costs.
"The most important uncertainty facing markets today isn't Fed messaging β it's the combination of geopolitical risks and the long-term economic impact of AI," said Adam Schickling, senior economist at Vanguard.
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 several one-time shocks.
βThe 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,β Karl Schamotta, chief market strategist at Corpay, wrote in a note.
