US Fed holds interest rates steady as inflation runs hot

The US Federal Reserve maintained its benchmark interest rate at 4 per cent during a 10-2 vote on Wednesday, as officials chose to be patient in the face of persistent inflation. The decision came a month after the Fed increased its target range to 3.75 to 4 per cent. The United Arab Emirates Central Bank, influenced by the dollar-pegged dirham, also maintained its benchmark rate at 3.9 per cent.

The Fed plans to review additional information to decide on appropriate policy actions to bring inflation down to its 2 per cent target. Two Fed officials voted against keeping rates steady, favoring a 25 basis point increase. Investors had anticipated a hold on rates, and a rate hike would have been surprising, particularly six days before the US midterm elections on November 3.

The Fed has not raised rates before an election since 2022. While most officials supported another rate hike this year in September, some have suggested they are not in a hurry to do so. The bond market apparently provides early insight for policymakers. The yield on the 10-year Treasury is around 5 per cent, while mortgage rates have reached over 7 per cent, stressing housing affordability.

The latest Fed meeting occurs at a challenging time, with inflation remaining stubbornly high. Recent data indicate consumer and wholesale price increases are higher than expected, with the Fed's preferred inflation gauge still at 3 per cent. The ongoing Iran war affects energy prices, which have surged due to supply concerns. In September, petrol prices jumped 9.1 per cent, representing more than half of the overall increase in the Consumer Price Index.

Energy prices have risen 20.4 per cent over the past year. The labor market appears stagnant, with the economy adding only 29,000 jobs last month and the unemployment rate staying at 4.2 per cent. This suggests growth may be driven by AI-driven investment rather than broad job creation, according to Ahmed Azzam, head of financial market research at Equiti Group.

Fed officials have acknowledged AI as another inflation driver, with major tech companies anticipating significant increases in capital expenditure due to their AI initiatives. Morgan Stanley analysts forecast Amazon, Alphabet, Meta, and Microsoft will raise their total capital expenditure by more than 50 per cent in 2027, potentially enduring higher borrowing costs.