Al-Shal: Interest Rate Hike Linked to Escalating Geopolitical Violence in the Region

Al-Shal reported that the U.S. Federal Reserve decided at its meeting last Wednesday to keep the base interest rate on the dollar unchanged at 3.75%–4.00%. The Fed had previously raised the rate by a quarter of a percentage point at its meeting on September 16, after a nine-month period of stability.

Al-Shal added: “In our view, factors supporting a further rate hike competed with those favoring a hold. Among the key factors supporting an increase was the report issued on October 14 by the U.S. Bureau of Labor Statistics. Consumer price inflation across all components in urban areas rose by 0.6% in September, following a 0.4% increase in August, bringing the 12-month rate to 3.7%. Within this, gasoline prices rose by 9.1% in September, and energy prices increased by 20.4% over the past 12 months, and remain on an upward trajectory amid the possibility of an expansion of geopolitical violence in our region.”

He clarified that the continued rise in inflation rates has widened the gap between the Federal Reserve’s 2% target and the current 12-month rate of 3.7%, representing a gap approaching double the target.

He emphasized that factors supporting a rate hold include the continued high growth rates of the U.S. economy, the sustained strength of private consumer spending—which is a key driver—ongoing productivity gains, and increased investment, albeit mostly in information technology companies, particularly artificial intelligence, which carries its own risks. Additionally, raising interest rates poses dangers to the cost of servicing public debt and could have repercussions on the dominance of the U.S. dollar.

Al-Shal pointed to another factor that may have influenced the assessment to hold rates: the timing, which falls less than a week before the midterm elections on November 3, and whose impact on the election trajectory could be significant. Since the Federal Reserve seeks to avoid being drawn into political conflict, which could affect its independence, it may have leaned toward holding rates steady.

He noted that holding the dollar interest rate is good news for the central banks of the Gulf Cooperation Council (GCC) countries, as a rate cut was neither proposed nor likely; therefore, all of them kept their currency interest rates unchanged. The U.S. Federal Reserve has one more meeting before the end of the current year, scheduled for December 9. Unless geopolitical violence in our region subsides, we believe it is likely that the Fed will resume raising interest rates.