Will the Fed continue to diverge from the policies of other central banks?

With 42 days until the Federal Reserve's next monetary policy meeting, markets are increasingly confident that the Federal Open Market Committee (FOMC) will make its first interest rate cut of the year in September. According to CME Group data, the market currently sees a 91% probability of a 25 basis point Fed rate cut in September. The Fed once aligned its policies with the Bank of England (BOE) and the European Central Bank (ECB), but these have recently diverged. Since 2025, the ECB has cut interest rates twice—in March and June—bringing the eurozone's benchmark rate to over 2% below that of the US. The June rate cut marked the ECB's eighth consecutive rate cut. In July, the ECB paused its interest rate cuts, citing concerns about global trade policy uncertainty. At its June meeting, the ECB also lowered its inflation forecast, projecting 1.6% for 2026. Its 2025 forecast is 2%, in line with its target, suggesting a pause in further rate cuts. However, its economic growth forecast was slightly lowered due to US tariffs on EU exports. The Bank of England cut interest rates in May and held them steady in June, primarily due to rising oil prices triggered by the conflict between Israel and Iran. Bank of England Governor Andrew Bailey stated that interest rates will "follow a gradually declining path." Bailey added, "The world is highly unpredictable." Federal Reserve Chairman Powell echoed this sentiment. In speeches since 2025, he has repeatedly emphasized the need to closely monitor economic data before adjusting policy. At the European Central Bank's annual forum in July, a reporter asked: If it weren't for the tariffs, would the Fed have already started cutting interest rates? Powell responded: "I think you're right. In fact, after we saw the scale of the tariffs, we paused; basically, U.S. inflation expectations rose significantly after the tariffs were introduced. We didn't overreact, or even react at all—we were just waiting." Last month, Powell also told the media that the FOMC "had not yet made a decision on September," which was expected, but he added that the central bank was weighing "the potential risks of waiting too long," including downside risks to the labor market. However, not everyone is convinced that the Fed will start cutting interest rates this fall. Bank of America (BoA) analysts pointed out in a recent report that the current labor market situation may not be as dire as it appears: while labor demand is declining, labor supply is also decreasing, resulting in a relatively stable unemployment rate. It's no secret that the indicator Powell focuses on most is the unemployment rate. BoA analysts also noted that their internal data suggests that US consumer spending hasn't declined significantly, but is actually growing. With a full 42 days until the policy meeting, everything remains uncertain.