US Federal Reserve Raises Interest Rates Amid Mounting Inflation and Energy Pressures

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, snapping a roughly nine-month holding pattern. The UAE Central Bank, which follows Fed decisions because of the dirham's peg to the dollar, is also expected to raise rates.

"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. Traders currently anticipate the Fed will remain on hold next month before raising rates again in December, according to CME Group data.

It also tests the resolve of Federal Reserve officials who typically “look through” spikes in energy prices on the assumption they are temporary shocks. With the Iran war in its seventh month and oil prices again topping $100 per barrel, the US central bank's calculus 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 per barrel after the attack on the pipeline before easing to around $107 per barrel 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 per 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 framed 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 the operations were “the two most successful Treasury auctions that we've had in 20 years”. Federal Reserve chairman Kevin Warsh entered this week's meeting facing pressure from global bond investors who are seeking to determine whether his actions showed credibility in fighting inflation after they were unconvinced by his performance in July.