Year-end review of monetary policy: Rate cut comes at the right time, Trump strikes suddenly, global central banks are at a crossroads again.

If 2023 is seen as a decisive turning point for major central banks around the world to shift towards easing monetary policy, then 2024 is facing the highly uncertain and lengthy impact of the final mile reality of anti-inflation. Looking back at 2024, as significant progress was made in the fight against inflation, except for the Bank of Japan, which has always gone against the global trend, most major central banks cautiously started a cycle of interest rate cuts. However, the different economic conditions in different regions around the world have meant that major central banks have not maintained a consistent pace, and the year 2024, coinciding with the elections, has also presented policymakers with many uncertainties. Looking ahead to 2025, with the risks of different economic conditions in different regions around the world, including the return of Trump and the turmoil in the political arenas of Germany and France, it is expected that economic and political factors will become the main considerations for major central banks in formulating monetary policy. Historic tightening suppresses inflation and officially starts the interest rate cut cycle In the first half of 2024, to curb inflation, major central banks globally maintained a "higher for longer" stance after raising interest rates to historic highs, keeping interest rates in a restrictive range to push inflation towards the target range. However, at the same time, economic growth was also impacted, and whether a "soft landing" could be achieved became another factor that most central banks needed to balance. In the second half of the year, with inflation and economic growth continuing to slow down, the Swiss National Bank took the lead in cutting interest rates, paving the way for a global easing cycle. Among the top 10 developed markets central banks globally, seven of them reduced interest rates this year, with only Australia and Norway maintaining unchanged rates. Japan, on the other hand, is in a rate hike mode. However, the path of interest rate cuts has not been smooth sailing, and the "soft landing" has not become the mainstream narrative for all countries. The return of Trump to office has reignited concerns about inflation among policymakers and markets, while the chaotic politics in various countries are affecting the prospects for economic growth, and the global path to easing seems to be at a crossroads again. Below is a summary of the monetary policy trends of major central banks globally in 2024: Federal Reserve In 2022 and 2023, the Federal Reserve aggressively raised interest rates to combat soaring inflation. After holding rates steady for eight consecutive times, the Fed finally lowered rates in September, announcing a 50 basis point cut in borrowing costs, officially starting the interest rate cut cycle. Subsequently, rates were reduced by 25 basis points in the past two meetings, accumulating a total of 100 basis points cut in 2024. The reasons for the Fed's interest rate cut were gradual slowing of inflation and cooling of the job market. However, the timing of the cut in September was much later than the market expectations at the beginning of the year, according to the Fed, the reason was that signs of cooling in the labor market did not appear until midyear. In the first 6 months of the year, inflation pressures continued to exist, and the job market maintained a healthy level, with new job additions only falling below 200,000 in April, and the unemployment rate did not rise above 4% until May. This gave the Fed enough confidence to keep the target range for the federal funds rate unchanged at a historic high level of 5.25% to 5.5% to address any sudden market conditions. However, the Fed's rhetoric began to subtly change in July. The monetary policy statement issued by the Fed on July 31 contained adjustments to the description of the labor market and inflation, implying that the central bank may be nearing a rate cut. The statement noted that inflation was gradually approaching the Fed's 2% target, and the risks to achieving price stability and maximum employment were more balanced. Chairman Powell also mentioned the timing of the rate cut at the subsequent press conference in September. With the July nonfarm data showing further cooling in the job market, the Fed officially started the interest rate cut cycle in September. Powell also explicitly stated in the press conference that the main purpose of this rate cut was to stabilize the job market. However, despite the Fed's unexpectedly large 50 basis point rate cut, Powell emphasized that this did not mean an increased expectation of an economic recession. As of the end of the year, the U.S. economy is still growing at a rate of over 3%, the inflation rate is also above the 2% target level, the unemployment rate remains low, and the stock market and housing prices are at historic highs. Although the Fed has cut rates by 100 basis points, compared to the fastest and most aggressive rate hikes in 40 years in 2022/23, the interval between the last rate hike and the first rate cut was 14 months - the average interval of the past 50 years was about 6 months, the Fed's position is not dovish. The policy rate is still in the restrictive range, with some distance from the so-called neutral rate. Even at the last meeting of the year, Powell sent hawkish signals, noting that while U.S. inflation was significantly cooling, the recent pace of progress was "disappointing," slower than expected. According to the CME's FedWatch tool, the market expects rates to remain unchanged in January and March of next year, with the concept of resuming rate cuts only at 46.2% in May. As for the balance sheet reduction, the Fed steadily progressed throughout the year, with the size of the balance sheet falling below $7 trillion. Currently, the market is more focused on when the Fed will end the balance sheet reduction. Although the Fed has started the interest rate cut cycle, the reduction of the balance sheet has not stopped, meaning that the Fed has not truly entered a period of easing. As of last Friday, the Fed's overnight reverse repo agreement (ON RRP) balance fell to $98 billion, the lowest level since April 2021, lower than the peak of $2.4 trillion at the end of December 2022. Meanwhile, on Wednesday, officials lowered the RRP agreement rate by 5 basis points compared to the lower limit of the target range. As part of quantitative tightening (QT), the Fed has withdrawn $2.1 trillion in liquidity from the market, and almost all of the withdrawal has come from ON RRP, not reserves. Currently, the interest on reserves (IOR) rate is 4.40%, with reserve levels reaching $3.28 trillion, still at the level when the Fed started QT in the summer of 2022. In terms of reserves, QT has not even started, and there may still be some way to go before reaching the Fed's target of "ample" levels. Ahead of the Fed's November policy meeting, major Wall Street banks surveyed by the New York Fed expect QT to end in May next year.The Federal Reserve will maintain its balance sheet at around $6.4 trillion.The European Central Bank (ECB) compared to the Federal Reserve, the ECB's stance is more dovish. Last year, the ECB acted slowly in response to the rising inflation and can be said to have only stopped raising rates very late. But now, the ECB seems determined to stay ahead in terms of policy and quickly bring interest rates back to neutral levels. Up until June, due to inflation still being above target levels, the ECB, like the Federal Reserve, kept interest rates unchanged at high levels. But unlike the US, the Eurozone economy seems unable to withstand the pressures of tight monetary policy. In fact, with the constrained monetary policy and an energy crisis caused by the conflict between Russia and Ukraine, the Eurozone economy has shown signs of weakness in 2023. Although the GDP growth rate of the Eurozone's 20 countries has rebounded this year, the two largest economies, France and Germany, are still struggling to recover. After experiencing five years of stagnation, Germany's current economic size is 5% smaller than its pre-pandemic growth trend. Weak economic growth has reinforced the ECB's accommodative plan. The ECB "jumped" ahead of the Federal Reserve to cut interest rates in June and proceeded to cut rates three more times in the following four meetings, totaling a loosening of 100 basis points. After the December rate decision, ECB President Lagarde stated at a press conference that the Eurozone economy is losing momentum and the risks to economic growth are on the downside. On the other hand, the two largest economies of Germany and France have recently been mired in political difficulties. In December, the German parliament held a special session to vote on a motion of no confidence in Chancellor Schultz, who failed to garner the support of over half of the members of parliament and early elections have been scheduled for February 23 next year. In November, Schultz dismissed his Finance Minister Christian Lindner, stating that the pro-business leader of the Free Democratic Party had rejected proposals to suspend new borrowing limits to help plug next year's budget deficit, thus triggering the political crisis. In France, the National Assembly passed a motion of no confidence against the government. According to the French Constitution, Prime Minister Michel Barnier submitted his resignation to the president on behalf of the government. This is the first time a French government has been overturned by parliament since 1962. Prior to this, Barnier attempted to bypass parliament and force through a social security bill, a move that sparked strong backlash from both the far-right National Rally and the left-wing party alliance. Both factions submitted motions of no confidence against the government and on December 4, the government was ultimately toppled. Just days after French President Macron appointed the country's fourth prime minister in a year, the Bank of France lowered domestic growth forecasts, stating that political turmoil has undermined confidence among families and businesses. The sudden political turmoil compounded by economic weakness has sparked renewed discussions about the euro reaching parity with the dollar, making the future monetary policy path of the European Central Bank more complicated. Analysts suggest that considering the weak German economy, political turmoil in France, and the potential trade impacts of Trump's return to the White House, the European Central Bank is expected to continue cutting interest rates before mid-2025 at each monetary policy meeting. Bank of England Compared to economies like the US and the EU, the Bank of England is very slowly lowering interest rates. The latest budget and all additional government spending announced are expected to promote economic growth in 2025. Meanwhile, UK inflation has risen again in recent months, with service sector inflation remaining high. After cutting interest rates by 25 basis points in August this year, the Bank of England only announced another 25 basis point rate cut in November, resulting in a cumulative rate cut of only 50 basis points this year. The UK economy is also suffering from weak growth, falling into technical recession at the end of 2023, but GDP growth in the first and second quarters of this year has shown a robust recovery, allowing the Bank of England to focus on combating inflation in the first half of the year. Furthermore, the first budget proposal from the Labour Party, the ruling party for the first time in 14 years, has reignited inflation concerns. However, at the recent rate meeting, policymakers had diverging opinions on whether a rate cut was needed to address the economic slowdown. At the December meeting, the Monetary Policy Committee (MPC) voted 6-3 in favor of the rate decision, whereas the market had only expected one member to support a 25 basis point rate cut. This indicates that an increasing number of central bank officials are supporting an immediate rate cut despite ongoing evidence of inflation. The latest data also shows that the UK economy's recovery has stagnated once again. For the three months ending in September, UK GDP remained unchanged, below the previously forecasted growth of 0.1%. Economic growth in the second quarter was also revised down to 0.4%. Matthew Ryan, Market Strategy Director at Ebury, stated that Bank of England officials seem "more divided on the future rate path than ever before," with doves focusing on the fragile UK economy, while hawks prefer a gradual approach to rate cuts, given the recent increase in inflation. Bank of Japan The Bank of Japan officially ended its era of negative interest rates in March this year and remained static after raising rates by 15 basis points in July, in September, October, and December. In order to overcome years of deflation, the Bank of Japan had maintained an ultra-loose policy until March, which led to a continuous depreciation of the yen. The continuous depreciation of the yen worsened the risk of imported inflation, and as the only central bank in the G10 group in a rate-hiking cycle, the Bank of Japan raised rates again in July. However, this unexpectedly sparked turmoil in the financial markets. Due to the rate hike by the Bank of Japan and the appreciation of the yen, arbitrage trades showed signs of reversal, leading to a "Black Monday" in global stock markets in early August. At that time, the volatility in financial and capital markets forced Bank of Japan officials to shift their hawkish stance. Although the Japanese stock market had regained all of the losses from "Black Monday," the Bank of Japan's every move still affects the nerves of global investors. Prior to the recent December rate meeting, markets were confused about when the Bank of Japan would raise interest rates due to official statements and media reports. Keiko Onogi, Senior Japanese Government Bond Strategist at Daiwa Securities, stated, "I don't know what the Bank of Japan wants to do - after July, I had hoped that the bank could improve its communication with the market, but the situation has not changed much. At the beginning of his tenure, Bank of Japan Governor Haruhiko Kuroda was praised for his clear and orderly communication style, which was seen by outsiders as conducive to his...One major difference with former president Haruhiko Kuroda is that he often shocks the global market with unexpected decisions.However, given the current inflation level, the yen, and the economic situation, the Bank of Japan is indeed in a dilemma. In addition, domestic political issues in Japan and uncertainties in overseas economies and policies also affect the central bank's monetary policy. The Bank of Japan sent a cautious signal at the December meeting, with Takeda Haruo stating that the decision to keep interest rates unchanged was mainly based on trends in wages, uncertainties in overseas economies, and an assessment of the policies of the next US government. Regarding the future economic and inflation outlook in Japan, the Bank of Japan's stance is similar to before, with no significant highlights. The Bank of Japan states that the economy is gradually recovering, but there are still some weaknesses; the uncertainty regarding the economic and price outlook in Japan remains high. In the latter half of the 3-year forecast period until FY 2026, the inflation level may align with the Bank of Japan's price target. Other central banks Most developed countries that maintain a hawkish stance include the Reserve Bank of Australia, which has not lowered interest rates throughout the year. However, recently, the Reserve Bank of Australia has softened its stance on inflation and noted unexpected slowdowns in economic growth, as high-interest rates have reduced household spending despite recent tax cuts. Currently, the market believes that the possibility of the first rate cut in February next year exceeds 50%. In contrast, the Swiss National Bank unexpectedly cut interest rates in March this year, becoming the first G10 country to lower rates since the outbreak of the COVID-19 pandemic. The Swiss National Bank has been at the forefront of a loose monetary policy this year, lowering rates to 0.5% as inflation continues to decline to its lowest level since November 2022. Outside of the major central banks, officials in Sweden, Pakistan, Chile, the Philippines, Mexico, and Colombia have all lowered interest rates this year. Morocco has reduced borrowing costs to encourage large-scale investments, including preparations for jointly hosting the 2030 FIFA World Cup. Russia has chosen to aggressively hike interest rates to address high inflation and the continuous depreciation of the ruble, but at its last meeting of the year, the interest rate was kept at 21%, surprising most analysts who had expected the central bank to raise rates to combat ongoing inflation. In 2024, central banks worldwide collectively raised rates 30 times and lowered them 193 times. Outlook for 2025: Trump 2.0 Striking, Inescapable Political Topic As major central banks globally begin to enter rate-cutting cycles one after another, relaxed policies are expected to continue to be the main theme in 2025. However, in addition to inflation and economic issues, geopolitical concerns, especially the potential policies of the US president-elect Trump, have become inevitable topics for major central banks when formulating monetary policies. Trump has threatened to implement aggressive tariff plans once in office, with economists generally believing this could lead to a resurgence of global inflation. This cautious sentiment was fully reflected at the December policy meetings. A Fed official opposed rate cuts at the Fed Reserve's rate decision, and the Fed also raised its inflation expectations and hinted at a smaller rate cut next year; the Bank of England saw three votes in favor of reducing borrowing costs; in Japan, a policymaker suggested raising rates, citing increasing risks of rising prices, but was outvoted by others who favored waiting for more information on wages and Trump's policies. In Europe, although the Russia-Ukraine conflict may soon end, the region may still face retaliation from Russia in the future. Some officials are concerned that direct military conflict may occur eventually and worry that if the US weakens security within NATO under Trump's leadership, Europe will be at risk. While central banks worldwide adhere to the independence of monetary policy decisions, a strong dollar in the midst of high-interest rates and the possibility of tariffs imposed by Trump pushing up inflation could lead to more uncertainty in the prospects of global policy easing. Fed Reserves: Return of Trump Before the December meeting began, it was widely believed that the Fed would take a hawkish stance with rate cuts, and the extent of policy easing in 2025 is expected to be about half of the 100 basis points predicted by policymakers three months ago. However, based on the latest hawkish positions of officials, the market currently prices in only one rate cut by the Fed in 2025. The prospects of a change in market expectations highlight some challenges Trump may face in fulfilling key campaign promises, as tightening policies by the Fed may keep consumer rates, such as mortgage rates, high, but a slower-than-expected slowdown in inflation could undermine the Fed's promise to lower prices. Powell revealed at a press conference following the December meeting that some FOMC members have begun to make preliminary assessments of the potential impact of Trump's policies. They are trying to determine how Trump's tariff plans, tax cuts, and immigration restrictions may impact policies. "Some have indeed taken very preliminary steps and started to condition high estimates of the economic impact of policy on this meeting," Powell said when discussing 2025's economic growth and inflation expectations. Powell has repeatedly urged caution about further rate cuts. Fitch expects that an increase in tariffs will have a negative impact on multiple countries, including the United States, Canada, Mexico, South Korea, and Germany, with global implications likely to be more pronounced in 2026. Fitch stated, "Tariffs will push up inflation in the US, and in fact, inflation remains tricky. The blow to immigration may reduce the growth of labor supply, exacerbating inflation, and we have raised our inflation expectations for the US. Nevertheless, we still expect the Fed to slowly lower rates to a neutral level next year, with a 125 basis point cut by the end of 2025. However, we no longer expect the Fed to further cut rates in 2026." Although some market participants question whether these concerns are exaggerated, especially considering the minimal impact of the 2018 Trump 1.0 tariffs on inflation, the reality is that price expectations were well anchored at that time. Research from the Oxford Economic Institute suggests caution when making such comparisons. Products affected by tariffs did indeed experience significantly higher inflation. Ultimately, what still determines the Fed's monetary policy is its dual mandate to maximize employment and price stability. According to the latest November non-farm payroll data, job growth was significantlyThe rebound was stronger than expected by the market, and the unemployment rate rose as expected to 4.2%; The inflation indicator most favored by the Federal Reserve - the US November PCE price index unexpectedly cooled, although the index is still above the Fed's 2% inflation target, it has significantly shown that the target is getting closer.Bob Powell clearly stated that the basic outlook is that the economy will continue to perform well, with sustained growth, low unemployment rates, and officials expecting inflation to slowly decline. Once inflation shows more progress, interest rates will be lowered again, and the "degree and timing of further adjustments to the target range" will depend on "upcoming data, evolving outlook, and risk balance." The latest dot plot shows that the Fed expects to cut interest rates twice in 2025, by 25 basis points each time, compared to the September expectation of four interest rate cuts, each by 25 basis points. The Fed expects to cut interest rates twice in 2026, by 25 basis points each time, consistent with the September expectation. The Fed's inflation forecast for Trump's first year in office has risen from the previous 2.1% to the current 2.5%. Inflation is expected to return to the 2% target level by 2027, which means the pace of rate cuts will slow down, and the endpoint of interest rates will be slightly higher at 3.1%, to be reached in 2027, compared to the September expectation of 2.9%. The long-term federal funds rate expectation has risen to 3.0%. Jean Boivin, the head of investment research at BlackRock, pointed out that the Fed has poured cold water on hopes of substantial rate cuts in 2025. He added that considering the risks of rising inflation due to potential trade tariffs and the pressure on the labor market due to slowed immigration, the expectation of only two more rate cuts in 2025 seems reasonable. Morgan Stanley's US economist Michael T. Gapen and his team released a report stating that the Fed's current hawkish outlook is largely consistent with their forecast - Trump's trade and immigration policies may keep inflation strong and delay further rate cuts by the Fed. Morgan Stanley added that the Fed's future rate-cutting prospects will depend on the progress of Trump's restrictive policies, but these policies may have a lagging impact on economic activity, so while the Fed is currently hawkish, it may switch to being dovish later. Just like in 2018, the Fed had predicted further rate hikes, but eventually chose to cut rates when economic activity slowed down. Goldman Sachs believes that in the long run, Trump's policies could have a more negative impact on economic growth than the short-term impact on inflation, prompting the Fed to cut rates to support the labor market. Regarding the Fed's rate-cutting path, Goldman Sachs expects only two 25-basis-point rate cuts in 2025, but they anticipate continued rate cuts afterward, until interest rates reach 2.6% by the end of 2026. Citi's chief US economist Andrew Hollenhorst believes that if there are signs of weakness in the job market, the Fed's hawkish policy stance may not be sustainable and may switch to dovish. He said, "In the coming months, the continued weakness in the job market may become more apparent, leading the Fed to cut rates faster than the market expects. We expect Powell and the committee to shift significantly dovish in the coming months." European Central Bank: Internal and external challenges The European Central Bank announced its fourth rate cut of the year in December and lowered its inflation forecasts for the next two years. The ECB's stance remains dovish, and it is expected to cut rates further next year. Currently, the money market has fully priced in an ECB rate cut of at least 100 basis points by 2025, reaching the lowest level since January 2023. Although ECB President Lagarde has been vague about further rate cuts, she has emphasized the risks that could lead to a downturn in economic growth, including the possibility of tightening trade relations between Europe and the US under Trump's leadership. Matthew Ryan, head of market strategy at global financial services company Ebury, said that Powell's comments may have a "relatively mild, but not zero" impact on the ECB, adding that the ECB is more likely to be influenced by Trump's policies. "The economic prospects for the US and the Eurozone entering next year are starkly different," Ryan noted, pointing out that the Eurozone's economic growth remains fragile and is susceptible to harsh trade policies. Due to the negative impact of escalating trade tensions on the economy, large banks such as Bank of America and Goldman Sachs believe that the ECB may cut rates further by a significant amount. Bank of America economist Ruben Segura Cayuela believes that the ECB's shift from a hawkish stance to a dovish stance signals the possibility of further significant rate cuts. "We expect the ECB to cut rates continuously to 1.5% by September next year," he said, adding that this forecast is based on deteriorating data and the increased risk of global trade tensions. "Given the return of uncertainty about trade policies and the impact of tariffs, the risk of accelerating the rate cut cycle is important." Goldman Sachs economist Sven Jari Stehn also highlighted the possibility of accelerating rate cuts based on economic outlook. "Given our forecast of slowing economic growth and gradually decreasing core inflation to 2%, we expect a rate cut of 25 basis points in January next year, possibly followed by a 50 basis point cut in March." Goldman Sachs expects that ongoing rate cuts will bring the deposit rate down to 1.75% by mid-2025, but Stehn pointed out that if the situation deteriorates, rate cuts could be "faster and more substantial." Bill Diviney, head of macro research at ABN AMRO Bank, predicted that trade tariffs could have a deflationary impact on the Eurozone, further lowering inflation below the ECB's 2% target. "We expect the ECB to cut rates by 25 basis points at each meeting next year, except for a pause in April. Eventually, we will see the ECB bring the deposit rate all the way down to 1%." In addition, there are internal concerns within the Eurozone, especially with recent government collapses in Germany and France facing fiscal problems. The coordination of monetary and fiscal policies becomes another major issue. Lagarde emphasized the need for a balanced approach between the two, stating that monetary policy decisions remain flexible and will not follow a predetermined path. She stressed that the significant economic challenges in the region cannot be solved by monetary policy alone, and the ECB "cannot be a one-stop solution for the European economy." President of Yardeni Research, senior Wall StreetAssistantBob Powell made a clear statement that the economy will continue to perform well, with sustained growth, low unemployment rates, and officials predicting that inflation will slowly decline. Once inflation shows more progress, interest rates will be lowered again, and the "degree and timing of further adjustments to the target range" will depend on "upcoming data, evolving outlook, and risk balance." The latest dot plot shows that the Fed expects to cut interest rates twice in 2025, by 25 basis points each time, compared to the September expectation of four interest rate cuts, each by 25 basis points. The Fed expects to cut interest rates twice in 2026, by 25 basis points each time, consistent with the September expectation. The Fed's inflation forecast for Trump's first year in office has risen from the previous 2.1% to the current 2.5%. Inflation is expected to return to the 2% target level by 2027, which means the pace of rate cuts will slow down, and the endpoint of interest rates will be slightly higher at 3.1%, to be reached in 2027, compared to the September expectation of 2.9%. The long-term federal funds rate expectation has risen to 3.0%. Jean Boivin, the head of investment research at BlackRock, pointed out that the Fed has poured cold water on hopes of substantial rate cuts in 2025. He added that considering the risks of rising inflation due to potential trade tariffs and the pressure on the labor market due to slowed immigration, the expectation of only two more rate cuts in 2025 seems reasonable. Morgan Stanley's US economist Michael T. Gapen and his team released a report stating that the Fed's current hawkish outlook is largely consistent with their forecast - Trump's trade and immigration policies may keep inflation strong and delay further rate cuts by the Fed. Morgan Stanley added that the Fed's future rate-cutting prospects will depend on the progress of Trump's restrictive policies, but these policies may have a lagging impact on economic activity, so while the Fed is currently hawkish, it may switch to being dovish later. Just like in 2018, the Fed had predicted further rate hikes, but eventually chose to cut rates when economic activity slowed down. Goldman Sachs believes that in the long run, Trump's policies could have a more negative impact on economic growth than the short-term impact on inflation, prompting the Fed to cut rates to support the labor market. Regarding the Fed's rate-cutting path, Goldman Sachs expects only two 25-basis-point rate cuts in 2025, but they anticipate continued rate cuts afterward, until interest rates reach 2.6% by the end of 2026. Citi's chief US economist Andrew Hollenhorst believes that if there are signs of weakness in the job market, the Fed's hawkish policy stance may not be sustainable and may switch to dovish. He said, "In the coming months, the continued weakness in the job market may become more apparent, leading the Fed to cut rates faster than the market expects. We expect Powell and the committee to shift significantly dovish in the coming months." European Central Bank: Internal and external challenges The European Central Bank announced its fourth rate cut of the year in December and lowered its inflation forecasts for the next two years. The ECB's stance remains dovish, and it is expected to cut rates further next year. Currently, the money market has fully priced in an ECB rate cut of at least 100 basis points by 2025, reaching the lowest level since January 2023. Although ECB President Lagarde has been vague about further rate cuts, she has emphasized the risks that could lead to a downturn in economic growth, including the possibility of tightening trade relations between Europe and the US under Trump's leadership. Matthew Ryan, head of market strategy at global financial services company Ebury, said that Powell's comments may have a "relatively mild, but not zero" impact on the ECB, adding that the ECB is more likely to be influenced by Trump's policies. "The economic prospects for the US and the Eurozone entering next year are starkly different," Ryan noted, pointing out that the Eurozone's economic growth remains fragile and is susceptible to harsh trade policies. Due to the negative impact of escalating trade tensions on the economy, large banks such as Bank of America and Goldman Sachs believe that the ECB may cut rates further by a significant amount. Bank of America economist Ruben Segura Cayuela believes that the ECB's shift from a hawkish stance to a dovish stance signals the possibility of further significant rate cuts. "We expect the ECB to cut rates continuously to 1.5% by September next year," he said, adding that this forecast is based on deteriorating data and the increased risk of global trade tensions. "Given the return of uncertainty about trade policies and the impact of tariffs, the risk of accelerating the rate cut cycle is important." Goldman Sachs economist Sven Jari Stehn also highlighted the possibility of accelerating rate cuts based on economic outlook. "Given our forecast of slowing economic growth and gradually decreasing core inflation to 2%, we expect a rate cut of 25 basis points in January next year, possibly followed by a 50 basis point cut in March." Goldman Sachs expects that ongoing rate cuts will bring the deposit rate down to 1.75% by mid-2025, but Stehn pointed out that if the situation deteriorates, rate cuts could be "faster and more substantial." Bill Diviney, head of macro research at ABN AMRO Bank, predicted that trade tariffs could have a deflationary impact on the Eurozone, further lowering inflation below the ECB's 2% target. "We expect the ECB to cut rates by 25 basis points at each meeting next year, except for a pause in April. Eventually, we will see the ECB bring the deposit rate all the way down to 1%." In addition, there are internal concerns within the Eurozone, especially with recent government collapses in Germany and France facing fiscal problems. The coordination of monetary and fiscal policies becomes another major issue. Lagarde emphasized the need for a balanced approach between the two, stating that monetary policy decisions remain flexible and will not follow a predetermined path. She stressed that the significant economic challenges in the region cannot be solved by monetary policy alone, and the ECB "cannot be a one-stop solution for the European economy." President of Yardeni Research, senior Wall StreetAssistantBob Powell made a clear statement that the economy will continue to perform well, with sustained growth, low unemployment rates, and officials predicting that inflation will slowly decline. Once inflation shows more progress, interest rates will be lowered again, and the "degree and timing of further adjustments to the target range" will depend on "upcoming data, evolving outlook, and risk balance." The latest dot plot shows that the Fed expects to cut interest rates twice in 2025, by 25 basis points each time, compared to the September expectation of four interest rate cuts, each by 25 basis points. The Fed expects to cut interest rates twice in 2026, by 25 basis points each time, consistent with the September expectation. The Fed's inflation forecast for Trump's first year in office has risen from the previous 2.1% to the current 2.5%. Inflation is expected to return to the 2% target level by 2027, which means the pace of rate cuts will slow down, and the endpoint of interest rates will be slightly higher at 3.1%, to be reached in 2027, compared to the September expectation of 2.9%. The long-term federal funds rate expectation has risen to 3.0%. Jean Boivin, the head of investment research at BlackRock, pointed out that the Fed has poured cold water on hopes of substantial rate cuts in 2025. He added that considering the risks of rising inflation due to potential trade tariffs and the pressure on the labor market due to slowed immigration, the expectation of only two more rate cuts in 2025 seems reasonable. Morgan Stanley's US economist Michael T. Gapen and his team released a report stating that the Fed's current hawkish outlook is largely consistent with their forecast - Trump's trade and immigration policies may keep inflation strong and delay further rate cuts by the Fed. Morgan Stanley added that the Fed's future rate-cutting prospects will depend on the progress of Trump's restrictive policies, but these policies may have a lagging impact on economic activity, so while the Fed is currently hawkish, it may switch to being dovish later. Just like in 2018, the Fed had predicted further rate hikes, but eventually chose to cut rates when economic activity slowed down. Goldman Sachs believes that in the long run, Trump's policies could have a more negative impact on economic growth than the short-term impact on inflation, prompting the Fed to cut rates to support the labor market. Regarding the Fed's rate-cutting path, Goldman Sachs expects only two 25-basis-point rate cuts in 2025, but they anticipate continued rate cuts afterward, until interest rates reach 2.6% by the end of 2026. Citi's chief US economist Andrew Hollenhorst believes that if there are signs of weakness in the job market, the Fed's hawkish policy stance may not be sustainable and may switch to dovish. He said, "In the coming months, the continued weakness in the job market may become more apparent, leading the Fed to cut rates faster than the market expects. We expect Powell and the committee to shift significantly dovish in the coming months." European Central Bank: Internal and external challenges The European Central Bank announced its fourth rate cut of the year in December and lowered its inflation forecasts for the next two years. The ECB's stance remains dovish, and it is expected to cut rates further next year. Currently, the money market has fully priced in an ECB rate cut of at least 100 basis points by 2025, reaching the lowest level since January 2023. Although ECB President Lagarde has been vague about further rate cuts, she has emphasized the risks that could lead to a downturn in economic growth, including the possibility of tightening trade relations between Europe and the US under Trump's leadership. Matthew Ryan, head of market strategy at global financial services company Ebury, said that Powell's comments may have a "relatively mild, but not zero" impact on the ECB, adding that the ECB is more likely to be influenced by Trump's policies. "The economic prospects for the US and the Eurozone entering next year are starkly different," Ryan noted, pointing out that the Eurozone's economic growth remains fragile and is susceptible to harsh trade policies. Due to the negative impact of escalating trade tensions on the economy, large banks such as Bank of America and Goldman Sachs believe that the ECB may cut rates further by a significant amount. Bank of America economist Ruben Segura Cayuela believes that the ECB's shift from a hawkish stance to a dovish stance signals the possibility of further significant rate cuts. "We expect the ECB to cut rates continuously to 1.5% by September next year," he said, adding that this forecast is based on deteriorating data and the increased risk of global trade tensions. "Given the return of uncertainty about trade policies and the impact of tariffs, the risk of accelerating the rate cut cycle is important." Goldman Sachs economist Sven Jari Stehn also highlighted the possibility of accelerating rate cuts based on economic outlook. "Given our forecast of slowing economic growth and gradually decreasing core inflation to 2%, we expect a rate cut of 25 basis points in January next year, possibly followed by a 50 basis point cut in March." Goldman Sachs expects that ongoing rate cuts will bring the deposit rate down to 1.75% by mid-2025, but Stehn pointed out that if the situation deteriorates, rate cuts could be "faster and more substantial." Bill Diviney, head of macro research at ABN AMRO Bank, predicted that trade tariffs could have a deflationary impact on the Eurozone, further lowering inflation below the ECB's 2% target. "We expect the ECB to cut rates by 25 basis points at each meeting next year, except for a pause in April. Eventually, we will see the ECB bring the deposit rate all the way down to 1%." In addition, there are internal concerns within the Eurozone, especially with recent government collapses in Germany and France facing fiscal problems. The coordination of monetary and fiscal policies becomes another major issue. Lagarde emphasized the need for a balanced approach between the two, stating that monetary policy decisions remain flexible and will not follow a predetermined path. She stressed that the significant economic challenges in the region cannot be solved by monetary policy alone, and the ECB "cannot be a one-stop solution for the European economy."The analyst Ed Yardeni also agrees with this view, calling on the European Union to take decisive action in terms of governance and economic growth reforms.However, analysts have different views on the dovish stance of the European Central Bank. They argue that one key factor causing market division is Lagarde's comments on the so-called "neutral interest rate," pointing out that policymakers have not discussed this issue. The market is betting that the key rate of the European Central Bank will drop to around 1.75% by the end of 2025, falling at the lower end of the European Central Bank's estimated rate of 1.75%-2.5% mentioned by Lagarde on Thursday. Furthermore, Arne Petimezas, research director at the Dutch brokerage firm AFS Group, stated that Lagarde's comments on high service sector inflation make her sound "quite hawkish." Ryan from Ebury also stated that if the US dollar strengthens further to parity with the Euro, the European Central Bank may slow down its easing steps. He added, "The biggest impact of 'Trump 2.0' will be the slowing economic growth." Overall, the policy direction is clear. In the December monetary policy statement, the European Central Bank conspicuously abandoned the commitment to maintain sufficiently restrictive rates "for as long as necessary," indicating a clear shift towards a more accommodative stance. Lagarde also made this point clear. In a recent speech, she stated, "After a long period of restrictive policies, we are increasingly confident about the timely return to the target of 2% inflation." "Lagarde appears very dovish," said Piet Christiansen, chief analyst at Danske Bank, adding that Lagarde's comments on inflation risks are currently two-sided, with weakening labor demand and downside risks to economic growth. Bank of England: Hawk-Dove Battle The level of dissent at the Bank of England's last interest rate meeting of the year has surprised the market, signaling uncertainty regarding the bank's future policy path. Throughout the year, the Bank of England has maintained a slow pace of rate cuts. At the December meeting, members of the Monetary Policy Committee who supported keeping rates unchanged emphasized the uncertainty of the outlook. Governor Bailey stated that the Bank of England needs to stick to its existing "gradual approach" to cutting rates. The Bank of England stated, "Overall inflation is expected to continue to rise slightly in the near term." Official data shows that inflation rose to 2.6% in November, making it the highest among G7 countries by a slight margin and slightly higher than the Bank of England's forecast from the previous month. Meanwhile, the Bank also downgraded its growth forecast for the final quarter of 2024 from 0.3% to zero. Although the Bank of England believes that Chancellor Rishi Sunak's budget on October 30th will have a net positive impact on economic growth in the short term, committee members pointed out that the cost of raising employment taxes will either be passed on to consumers through price increases or will lead to unemployment and a slowdown in wage growth, and remains "particularly uncertain." Additionally, the Bank of England added that any changes in US trade policy under the incoming President Trump are also difficult to predict in terms of their impact on the UK. Bailey stated, "With increased economic uncertainty, we cannot commit to when or by how much we will cut rates next year." Therefore, some observers believe that the Bank of England's rate cuts next year will continue to be slow, with the currency markets currently expecting a rate cut of around 50 basis points. Yael Selfin, Chief Economist at BDO UK, stated, "The ability of the Monetary Policy Committee to relax rates next year will be constrained by a challenging inflation background." She added, "This puts the Bank of England in a unique position compared to other central banks, especially the European Central Bank. In Europe, the weakening economic outlook has increased the urgency for rate cuts." Lindsay James, Investment Strategist at Quilter Investors, said that the impact of the hawkish comments from the Federal Reserve on the Bank of England is likely to be minimal, noting that the market had almost no re-pricing after the meeting. However, she pointed out that a stronger US dollar could put pressure on the pound, pushing up import inflation and ultimately slowing down the rate cuts. "Both the pound and the euro against the dollar could weaken further, causing import inflation to rise, especially in fuel inflation, with less impact on food inflation. This limits the space for rate cuts." However, economists are more optimistic, expecting the Bank of England to cut rates four times next year, due to the weakness of the UK economy. The country's economy experienced contraction in September and October, the first consecutive contraction since the pandemic, and third-quarter economic growth stagnated mainly due to the government's announcement of a 25 billion ($31 billion) tax hike on business employers. Sanjay Raja, Chief UK Economist at Deutsche Bank, stated that he expects the Bank of England to cut rates by 25 basis points in February next year, and then wait until the second half of the year to cut rates by 75 basis points. Bank of Japan: The Unique Situation The Bank of Japan kept its benchmark rate unchanged at 0.25% at its December rate meeting and chose to take time to assess the impact of financial and forex markets on Japanese economic activity and prices. The current dilemma for the Bank of Japan is whether to wait for the results of the spring wage negotiations before deciding whether to increase rates or to preemptively raise rates to prevent further depreciation of the yen. Bank of Japan Governor Kuroda said, "There is uncertainty about the policies of the upcoming US government, so we need to carefully examine their impact." He also pointed out that Trump's trade and fiscal policies will have a huge impact on the global economy and financial markets. Both forex strategists and Japanese companies are concerned about the negative impact that Trump's policies could have on Japan. A survey of Japanese companies showed that nearly three-quarters of them expect Trump to have a negative impact on their business environment. Forex strategists pointed out that if the Bank of Japan keeps rates unchanged until March next year or later, there could be a danger of further yen depreciation. Some strategists said that widening yield differentials might also revive yen carry trades, with the nightmare of "Black Monday" potentially resurfacing. Shigeto Nagai, Director of Japanese Economics at the Oxford Economics Institute, stated that the more cautious stance of the Federal Reserve on rate cuts in 2025 increases the risk of further strengthening of the US dollar.I am going to the store to buy some groceries.He said, "If the financial markets have a clear understanding of Trump's policies and the US dollar strengthens further, the weakness of the Japanese yen may once again become the main driving force behind the Bank of Japan's interest rate decisions in 2025." "The depreciation of the yen will continue to be a risk faced by the Bank of Japan in 2025, as it will squeeze real income, hindering the wage-driven inflation dynamics." In addition to the threat from the US dollar, the Bank of Japan's policies are also influenced by domestic political turmoil. The unexpected election of Shigeru Ishiba as Japan's Prime Minister, who supports the normalization of Bank of Japan policies, boosted the performance of the yen. However, Ishiba's decision to hold early elections in October resulted in his party losing its majority. The leader of the opposition party, the Democratic Party for the People, has opposed the Bank's rate hikes, stating that policymakers must consider whether real wages have turned positive when formulating fiscal and monetary policies. In fact, the strong results of the spring wage negotiations in March this year were a prerequisite for the Bank of Japan to end negative interest rates. Therefore, wage trends will also be a key factor in deciding whether to raise interest rates, which will determine the sustainability of inflation. In Japan, the annual spring labor-management negotiations have become an important variable in observing the economic trends in Japan and serve as an indicator for wage increases throughout the year. Kazuo Ueda stated that monetary policy depends on the economy and inflation. If the economic outlook is achieved, interest rates will be raised. He stated that recent economic data roughly aligns with the outlook and will decide on the timing of adjustments after checking the data, with a focus on the momentum of the spring wage negotiations. The winter bonus survey conducted until December 2, 2024, shows that due to the continued recovery of the manufacturing industry, Japanese companies are increasing the amount of bonuses given to employees. Specific data shows that the average bonus amount per person (weighted average) reached about 936,800 yen, an increase of 3.49% compared to the previous year, reaching a historical high for two consecutive years. The amount of winter bonuses given by Japanese companies has been increasing for four consecutive years, reaching the highest level since the survey began in 1975, with an increase of 1.08 percentage points from the previous winter. Among the 497 companies surveyed, approximately 43.66%, or 217 companies, will determine the amount of winter bonuses to be given in the upcoming spring wage negotiations. However, whether small and medium-sized enterprises that dominate the Japanese economy can keep up with the wage increases of large companies is an uncertain factor in the spring wage negotiations next year. While large companies have signaled their readiness to continue raising wages to attract talent, it remains uncertain whether small businesses can follow suit, as many lack the global influence and competitive advantage enjoyed by their larger counterparts. According to estimates from a survey conducted by the Japanese Ministry of Finance from July to September, small and medium-sized enterprises have allocated about 70% of their profits to wage costs, much higher than the approximately 40% allocated by large companies. A recent survey showed that although 68% of small and medium-sized enterprises raised wages this year, most did so out of necessity, such as retaining workers, rather than reflecting an increase in income. The survey by the Japan Chamber of Commerce and Industry (JCCI) also showed that many small and medium-sized enterprises find it more difficult to pass on labor costs compared to the continuously increasing costs of raw materials and energy. Moody's analyst Stefan Angrick stated that although the Bank of Japan did not take action earlier, it appears determined to further tighten its policy. The latest economic data limits the choices of the Bank of Japan: the strength of the Japanese economy is not sufficient to significantly raise interest rates, but the current situation may lead to further depreciation of the yen and exacerbate inflation. Moody's analysis predicts that the Bank of Japan will raise interest rates twice in 2025. If wages and economic growth exceed expectations, the yen weakens again, or overseas central banks raise interest rates, the Bank of Japan may increase the intensity of its tightening policies.