The Federal Reserve voted unanimously to leave interest rates unchanged between 4.25% and 4.50% at its May FOMC meeting, broadly in line with expectations. This marks the third consecutive meeting during which the central bank adopted a data-dependent, wait-and-see approach since the quarter-point reduction in December 2024. The rationale behind this move is that the U.S. economy remains on a solid footing, as evident from the persistent strength in hard economic data, particularly labor market reports. The unemployment rate is holding steady at a low of 4.2% and has remained in a narrow range over the past year. As a result, the Fed is well positioned to wait and monitor forthcoming economic data points before deciding its next move. Powell stated the Fed is comfortable with its current stance and can afford to be patient, while also being prepared to act quickly if the economy weakens.
Another factor that influenced the Fed’s decision is the potential inflationary impact of Trump’s tariffs. The word “uncertainty” was bandied about several times by Powell, especially pertaining to the scope and magnitude of tariffs. Although negotiations are underway, the complexities in reaching trade deals are many. While the Fed hopes any tariff-driven spike in prices will be transitory, persistent price pressures of a considerable magnitude could cause inflation to become entrenched, particularly if trade deals fail to materialise or if tariffs are increased. As such, the central bank sees increased risk of higher unemployment and higher inflation down the line. This has elevated the possibility of stagflation, making the Fed’s path forward even more uncertain.
Given the currency peg between the dirham and the dollar, the Central Bank of the UAE (CBUAE) is also expected to maintain the Base Rate for the Overnight Deposit Facility (ODF) at 4.40% while maintaining the interest rate for borrowing short-term liquidity from the bank at 50 bps above the Base Rate for all standing credit facilities. This implies that borrowers may not experience immediate relief on their loan obligations. Nevertheless, the robust expansion of the non-oil sector continues to support the UAE economy, helping it remain relatively resilient amid global uncertainties. As a result, the UAE is well-positioned to function as a safe haven in the prevailing macroeconomic climate.
