The US Federal Reserve raised interest rates for the first time in three years on Wednesday, as stubbornly high inflation and rising oil prices caused by supply disruptions in the Middle East ripple across the global economy.
Policymakers at the US central bank raised interest rates by 25 basis points, bringing the target range to 3.75 to 4 per cent, ending about nine months of stasis.
The UAE Central Bank, which follows Fed decisions because of the dirham's peg to the dollar, also raised rates by 25 basis points. Central banks in Saudi Arabia and Qatar, whose currencies are also pegged to the dollar, raised rates shortly after the announcement as well.
"While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient," the Fed said in a statement.
Wednesday's decision completes a striking turnaround for the Fed, which investors earlier this year anticipated would cut rates. New projections released alongside the latest decision showed Fed officials anticipate issuing another rate increase by the end of the year.
Twelve of the 19 members on the Federal Open Market Committee expected the federal funds rate to fall in the target range of 4 and 4.25 per cent this year.
One member did not submit their projections on the "dot plot", which was probably Fed chairman Kevin Warsh, who has previously voiced his displeasure with the exercise.
It also tests the resolve of Fed officials who typically “look through” surges in energy prices on the assumption that they are temporary shocks. With the Iran war in its seventh month and oil prices again topping $100 a barrel, the US central bank's thinking has changed.
Traffic through the Strait of Hormuz remains significantly below prewar levels. Houthi rebels in Yemen have threatened to disrupt shipping in the Red Sea, and Saudi Arabia has shut down its East-West pipeline after it sustained damage from drone attacks launched from Iraq.
Brent crude, the international benchmark, had traded as high as $109 a barrel after the attack on the pipeline before easing to about $107 after President Donald Trump's administration said it would resume operations within days. West Texas Intermediate, the gauge for US crude, was trading at $104 a barrel.
Energy prices were the primary driver in last week's inflation reading, which showed price pressures remained firm in August at 3.4 per cent on an annual basis. Petrol prices rose 3.9 per cent for the month, with the broader energy index rising 2.1 per cent. Core inflation, which strips out food and energy, rose 2.4 per cent year on year.
The Fed decision also comes amid an artificial intelligence spending boom, continued economic growth and Mr Trump's latest round of tariffs on Canada, which is America's second-largest trading partner behind Mexico.
The quarter-point rate increase defied noise from the Trump administration, which has been pushing for lower interest rates and even threatened to impose new tariffs if the Fed did not lower borrowing costs.
Meanwhile, the yield on the benchmark 10-Year US Treasury has climbed above 5 per cent, reaching its highest level since 2007, reflecting a global rise in borrowing costs.
The Trump administration has portrayed the rise in Treasury yields as a sign of economic growth. The Treasury Department had previously announced it would triple its buyback of government debt from $2 billion to $6 billion to ease bond yields, although yields have continued to rise since then.
Treasury Secretary Scott Bessent told politicians on Tuesday that the operations were “the two most successful Treasury auctions that we've had in 20 years”.
Mr Warsh entered this week's meeting facing pressure from global bond investors who are looking to see whether his actions showed credibility in fighting inflation after they were unconvinced by his performance in July.
Hawkish support has been rising since then, with three members voting against July's decision to hold rates. Other officials in recent weeks have indicated a willingness to raise rates if inflation does not ease.
