Federal Reserve Chair Kevin Warsh said in written testimony Tuesday that the Fed will make high inflation a thing of the past, yet provided no signal about the central bank’s next steps amid a divided policy committee and rapidly changing economic conditions driven by energy shocks and AI investment.
Warsh’s testimony, delivered to the House Financial Services Committee on July 14, comes at a critical juncture for Gulf-based businesses and investors tracking U.S. monetary policy. About half of the 19 members of the Fed’s interest rate-setting committee expect they will need to raise the key rate by year-end, while nearly half have penciled in no change or even a cut.
The Fed’s preferred inflation measure stands at 4.1%, far above its 2% target. However, government data released the same day showed prices dropped 0.4% in June from May, the largest monthly decline in four years, with year-over-year inflation easing to 3.5% from 4.2% in May.
Warsh identified artificial intelligence investment as the most striking feature of the economy right now, saying the Fed is monitoring the implications for inflation and employment. Massive AI infrastructure spending by hyperscalers including Google parent Alphabet, Microsoft, Amazon, and Meta Platforms has driven semiconductor prices higher, leading to price increases for laptops, tablets, and consumer electronics.
For Dubai and the broader UAE, U.S. monetary policy decisions have direct implications. The UAE dirham is pegged to the U.S. dollar, meaning Fed rate decisions influence local borrowing costs and investment flows. Higher U.S. rates could constrain liquidity in Gulf banking systems and affect the pace of regional infrastructure projects.
The renewal of the Iran war has complicated the inflation picture, with oil prices climbing after the U.S. reimposed a naval blockade on Iran. Gas prices have fallen about 20% from their peak but remain approximately 35% higher than before the U.S. attacked Iran on February 28.
Fed Governor Christopher Waller said Monday that another hot inflation report would mean the Fed would have to consider raising rates in the near term. However, New York Fed President John Williams said last week that if core inflation maintains a 0.2% monthly pace, the Fed could avoid hiking rates and hold steady while monitoring data.
The Fed’s policy direction will be closely watched in Gulf capitals, where sovereign wealth funds and government-linked investors have significant exposure to U.S. markets and interest rate-sensitive assets.
Sources: Chicago Tribune, The Business Times
