The Federal Reserve’s latest decision to raise interest rates by 25 basis points has put markets on alert for what comes next. While the hike was broadly expected, the Fed’s guidance on further tightening, alongside movements in the US dollar, Treasury yields and equities, will shape the market reaction in the weeks ahead. For the UAE, the decision also carries direct implications as the Central Bank adjusts rates in line with the US Federal Reserve, affecting borrowing costs, deposits and interest rate sensitive sectors.
Vijay Valecha, Chief Investment Officer, Century Financial
“The Fed delivered a unanimous quarter-point hike on Wednesday, lifting rates to 3.75–4.00%, the first increase in more than three years. The dot plot pointed to one more hike this year, and traders now price in a greater-than-60% chance of another move as soon as October. Bond investors welcomed the decision as a sign the Fed remains independent and committed to fighting inflation. President Trump demanded rates at 1% or lower but stopped short of criticising Warsh directly.
Gold and silver fell 0.6–1% yesterday but, as a display of strength, held support. Gold recovered to around $4,290 on Thursday. The stronger dollar capped precious metals, though underlying demand continues to limit the downside. Equities dipped after the decision, with the S&P 500 down 0.55% and the Nasdaq 100 little changed at -0.04%. In today’s session, futures have recovered, rising 0.6%. A limited reaction like this points to relatively muted concern over the hike’s impact on growth.
The dollar had its best day in three months, crossing 100 on the DXY, supported by expectations of further tightening.
Short-end Treasury yields rose sharply, with the two-year at 4.73%, its highest since 2024. The 10-year held at 5% and the 30-year pulled back modestly. This suggests that markets believe the Fed will keep inflation in check.
The CBUAE followed the Fed immediately, raising its Base Rate by 25 basis points to 3.9%. This move is effective today. EIBOR will follow, pushing up costs on variable-rate mortgages and EIBOR-linked business loans. Possible beneficiaries include banks, which stand to gain from wider lending spreads. Also, savers may benefit, as dirham deposit rates should edge higher. UAE equities are likely to respond unevenly in today’s session: banks are better positioned, and property and consumer stocks are likely to face a fresh headwind from higher financing costs.”
Aliasgar Tambawala Co-CIO, Klay Group
“The Federal Reserve raised the fed funds target range by 25 basis points to 3.75–4.00%, its first hike since July 2023. The decision was unanimous, while the updated projections indicated that most policymakers see scope for further tightening this year.
Overall, we see the September FOMC meeting as distinctly hawkish. The Fed does not appear inclined to pause until there is clearer and more sustained evidence of inflation moderating towards its target. The relatively elevated path for policy rates and the increase in the longer-run rate projection reinforce the risk that rates could remain higher for longer.
Against this backdrop, we believe there remains a meaningful risk of further tightening. While the median projection indicates one additional hike this year, another two hikes cannot be ruled out if inflation remains sticky, and economic activity continues to hold up.
Alternatively, even after one additional hike, the Fed could remain on hold for an extended period rather than quickly reversing course. Energy prices and geopolitical developments add further uncertainty, particularly if they begin to feed into broader prices and inflation expectations.
Markets also interpreted the meeting as hawkish, with the US dollar strengthening; Treasury yields moving higher and the yield curve flattening, while US equities reversed earlier gains.
At the same time, the Fed’s resolve to bring inflation sustainably back towards target should be constructive over the medium term. Anchored inflation expectations and greater price stability should ultimately provide a more stable foundation for economic growth and financial markets.”
Hamza Dweik, Head of Trading (MENA), Saxo Bank
“The Fed’s decision to raise rates by 25 basis points to a target range of 3.75% to 4.00% was widely expected by markets, with expectations running above 90% heading into the meeting. What matters now is less the hike itself and more the message that accompanied it. Policymakers reiterated that inflation remains elevated, and their updated projections suggest rates could remain restrictive for longer, with the possibility of another increase before year-end.
For the UAE, the immediate implication is that financing costs are likely to remain elevated. Given the dirham’s peg to the US dollar, the UAE Central Bank typically mirrors Fed moves, meaning borrowing costs for mortgages, personal loans and business lending are unlikely to ease anytime soon. The increase takes US rates to their highest level since 2023, and that reinforces the higher-for-longer environment borrowers have been preparing for.
That said, the UAE economy remains relatively well positioned to absorb tighter monetary conditions. Economic momentum continues to be supported by strong non-oil activity, population growth, tourism, and ongoing investment. While higher rates may slow some credit demand, particularly among SMEs and highly leveraged borrowers, they are unlikely to materially derail growth. Rather, the impact is more likely to be seen through a moderation in borrowing activity rather than a sharp slowdown in economic activity.
The bigger takeaway is that the Fed is signaling inflation remains a concern. US inflation is still running at around 3.4%, well above the Fed’s 2% target, and policymakers have indicated that one additional rate increase this year remains a possibility. If that outlook materializes, UAE borrowers could face elevated financing costs for longer than previously expected.
On the other side of the equation, savers continue to benefit. Higher benchmark rates support stronger returns on deposits and cash holdings, which has become an increasingly attractive proposition after years of near-zero rates. For UAE households and businesses, the current environment continues to reward liquidity and disciplined borrowing, while making debt-financed expansion projects more expensive than they were just a few years ago.
I think the key question for the UAE is no longer whether rates move higher today, but how long they stay at these levels. The Fed has effectively signaled that inflation remains the priority, which suggests borrowing costs across the UAE are likely to remain elevated well into 2027.”
Manjeet Markanda, Head of Trade Support, Lunaro Markets Limited
“Markets have plenty to think about following yesterday’s Federal Reserve decision, where rates were raised by 25 basis points to 3.75%-4.00%. While the rate increase itself was largely expected, the message from the Fed was perhaps more significant, with policymakers signalling that another rate increase could be possible before the end of the year. The latest projections, therefore, put the median Fed funds rate at 4.1% for the end of 2026.
The immediate market reaction was fairly clear. As expected, USD strengthened, Treasury yields moved higher, and US equities came under pressure, with the S&P 500 falling around 1% and the Nasdaq also finishing lower. The USD also moved to a seven-week high.
The message from the Fed appears to be that inflation remains the main concern. The latest projections put 2026 PCE inflation at 3.7%, above the Fed’s 2% target, although economic growth was also upgraded slightly. This suggests the Fed believes the economy remains sufficiently resilient to cope with higher rates.
For markets, this creates an interesting balancing act. Higher rates and bond yields can put pressure on equities, particularly those companies whose valuations depend heavily on future growth. A stronger dollar can also create headwinds for commodities and companies with significant overseas earnings.
Gold, for example, initially moved higher following the decision but then reversed sharply, falling back towards $4,240 an ounce as the stronger dollar and higher rates reduced its appeal.
There are, however, still plenty of uncertainties. Geopolitical tensions, energy prices, inflation and the strength of the US economy could all influence what the Fed does next. Markets will therefore be watching the economic data closely rather than assuming that another rate rise is inevitable.
In the months ahead, changes in interest-rate expectations, bond yields and the USD may matter as much to markets as the actual rate level. If inflation remains stubbornly higher, markets may have to adjust to the possibility of rates staying higher for longer. If inflation begins to fall more convincingly, attention could quickly shift back towards the prospect of easier monetary policy.
For now, the message from the Fed appears to be fairly straightforward: the fight against inflation is not over, and markets should not assume that yesterday’s rate increase will necessarily be the last. Of course, periods like this are a reminder that markets can move quickly and unpredictably, and that trading leveraged instruments comes with real risk, not something every investor may be comfortable carrying. Those considering it would do well to understand exactly what’s at stake before acting.”
Madhur Kakkar, Founder and CEO, Elevate Financial Services
“The Fed’s 25bp hike was broadly expected, but the tone remains the more important takeaway. The Committee is signalling that inflation risks are not yet fully behind it, keeping the door open for further tightening and reinforcing a higher-for-longer rate environment.
Markets are likely to remain cautious in the near term, particularly as higher US yields and a firmer dollar can weigh on risk appetite and liquidity-sensitive assets. The next set of US inflation and labour-market data will be critical in shaping expectations for the Fed’s next move.
For the UAE and the wider GCC, the impact is largely transmitted through the dollar peg, implying tighter domestic financial conditions and higher borrowing costs. That said, the region remains relatively well positioned given strong banking-system liquidity, healthy sovereign balance sheets and continued support from the energy sector.”
