US Fed holds interest rates steady as inflation runs hot

The US Federal Reserve held interest rates steady on Wednesday in a 10-2 vote, as officials opted for patience amid lingering inflation concerns.

The decision was expected to be a short reprieve from raising short-term interest rates after the Fed raised its target range to 3.75 to 4 per cent last month. The UAE Central Bank, which follows Fed decisions because of the dirham's peg to the dollar, was also expected to hold rates steady.

"Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2 percent goal. The Committee will deliver price stability," the Fed said in a statement.

Two Fed officials voted against the decision, preferring to raise rates by 25 basis points.

Investors had largely priced in a hold on Wednesday, and a rate increase would have been viewed as a surprise move coming six days before the midterm elections on November 3. The Fed typically does not move rates before election day, last doing so in 2022 in response to the inflation surge.

Investors still anticipate a quarter-point increase when Fed officials meet for the final time this year in December, according to CME Group data, which would bring their target range to 4-4.25 per cent. Most officials indicated in September they would be in favour of another rate increase this year, although some have argued in public remarks since then they are currently in no rush to do so.

“With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information,” New York Fed president John Williams said in remarks at an event in Buffalo on September 29.

However, markets were expected to closely monitor Fed chairman Kevin Warsh's post-meeting news conference for any clues about possible future moves.

In some ways, the bond market is doing policymakers' jobs for them. The yield on the 10-year Treasury, which sets the baseline for borrowing costs across the economy, has been hovering around 5 per cent. Mortgage rates have also surged past 7 per cent in recent weeks, placing further strain on housing affordability.

The latest meeting comes at an awkward moment for the Federal Reserve, which continues to face stalled progress on inflation. Recent government data showed consumer and wholesale price reports came in stronger than expected, while the Fed's preferred inflation gauge remains stuck around 3 per cent.

Partly contributing to this picture is the Iran war's impact on energy prices. The Fed typically looks through energy costs because rate decisions cannot directly affect a loss of supply such as the one being experienced in the Middle East, although the prolonged conflict is testing this ability.

Petrol prices jumped 9.1 per cent in September on a monthly basis, representing more than half of the all-items monthly increase for the Consumer Price Index. For the last 12 months, petrol prices are up 34.2 per cent, while fuel oil is up 74.2 per cent. Overall, energy is up 20.4 per cent over the last year.

The labour market also appears to remain stuck. The economy added 29,000 jobs last month while the unemployment rate remained fixed at 4.2 per cent. This suggests economic activity is being fuelled by AI-driven investment instead of broad-based employment growth, said Ahmed Azzam, head of financial market research at Equiti Group.

Fed officials have also acknowledged the artificial intelligence buildout as another inflation driver as Amazon, Meta and other so-called hyper scalers continue to spend billions on AI infrastructure. Speaking in Thailand earlier this month, Mr Warsh said central bankers have to recognise this AI investment as a “shock”, even as he sees it contributing to long-term wealth and productivity gains.

However, raising interest rates could have a muted impact on the hyperscalers that are considered to be key drivers of the economy.

Morgan Stanley analysts said Alphabet, Amazon, Meta and Microsoft are expected to raise their total capital expenditure by more than 50 per cent in 2027 compared with 2026, and will probably be able to withstand higher funding costs.

Alphabet and Microsoft were due to report their quarterly earnings after the closing bell later on Wednesday.