Fed Holds Steady on Interest Rates, but September Hike Looms

The US Federal Reserve is expected to maintain its federal funds rate at 3.5% to 3.75%, following its June meeting, when it made a similar decision. This would likely lead the Central Bank of the UAE (CBUAE) to keep its Base Rate at 3.65%. The CBUAE generally moves its main policy rate in step with the Fed due to the dirham's peg to the US dollar.

Despite expectations of an immediate rate increase easing after oil prices fell on Monday, some analysts describe the decision as increasingly close. Renewed US-Iran tensions and volatile oil prices have complicated the outlook, making central banks more cautious about borrowing costs.

Brett House, an economics professor at Columbia Business School, said that the inflation challenge could put the Fed at odds with US President Donald Trump's preference for lower rates. 'It sets up a potential conflict between Trump and the Fed, where his desire for lower interest rates is unlikely to be realised anytime soon,' House said.

Morgan Stanley Research believes financial markets may be overstating the risk of another increase. It expects the Fed to hold rates for the rest of 2026 as inflation moderates, before potentially delivering two cuts in 2027. The bank argues that higher bond yields have already tightened borrowing conditions without the need for a rate hike.

The direction beyond July remains uncertain, with markets seeing a possible increase and Morgan Stanley expecting a prolonged pause.