In Frankfurt and Zurich on February 7th, Reuters reports that central banks globally have ample leeway to continue lowering interest rates. Analysts and policymakers suggest a potential ongoing divergence from the U.S. Federal Reserve as it pauses rate cuts.
This separation could pose challenges for President Donald Trump, diluting the impact of his proposed tariffs and possibly leading to increased borrowing costs for U.S. entities.
The Fed, usually a trendsetter, faces unusual circumstances at the start of 2025 due to strong U.S. economic conditions amid global struggles and trade uncertainties emanating from Trump's policies.
The tentative nature of Trump's trade policy is somewhat counteracted by how the global economy's adjustment to a looming trade war is somewhat nullifying the effects of tariffs, benefiting foreign companies trading with the U.S.
For instance, Switzerland stands to gain from a weaker franc, aiding its exports to the U.S. by offsetting the potential impacts of U.S. tariffs.
As the ECB and some others have recently cut interest rates post-Fed decision to hold, signs emerge that Trump's stance on U.S. interest rates may be evolving. Policy divergence is also influenced by economic fundamentals, with the U.S. economy outperforming and needing higher rates to curb inflationary pressures.
Despite the rate gap narrowing, potential concerns lie in significant currency devaluation leading to inflation and a potential surge in energy prices affecting inflation rates.
Furthermore, central banks' influence on short-term rates contrasts with market-driven long-term rates; thus, if U.S. yields rise, borrowing costs may increase, impacting economic growth.