It is reported that during his second year back in the White House, US President Trump is vigorously advancing major changes in fiscal policy and the trade landscape, frequently threatening the independence of the Federal Reserve's monetary policy while persistently demanding aggressive interest rate cuts from the Fed. Global central banks have begun to diverge in their interest rate paths. In responding to economic uncertainty and severe market volatility triggered by US fiscal or monetary policies under Trump's leadership, major central banks worldwide are adopting distinctly different monetary policies to stimulate economic growth, rather than blindly following the Fed's monetary policy shifts.
According to the latest economic forecasts from Bloomberg Economics, the monetary policies of major global economies—whether developed or developing—may no longer move in sync over the next two years as they have in the past.
Following the post-COVID-19 global easing and the largely concluded monetary policy tightening cycle, the interest rate paths of the world's most significant monetary economies are likely to become increasingly diverse in the coming period. As indicated above, the monetary policy paths among the G-10 developed economies are set to show significant divergence.
The Trump Variable
Since the beginning of 2025, when Trump, having won the US presidential election again, officially returned to the White House, the "Trump variable"—the specific evolution of globally oriented policies such as aggressive tariffs on foreign countries and threats to the Fed’s independence to demand substantial rate cuts under the Trump administration—has become the most critical factor constraining the policy maneuverability of global central banks and influencing global stock market trends.
Trump's policies and the direction of the US economy and politics are affecting central bank decision-making expectations, particularly regarding the future direction of the Fed's monetary policy, rate cut expectations, and political pressure. These issues undoubtedly have a significant impact on the monetary policy rate paths of the global central banking system. The economic uncertainty and "economic haze" brought about by Trump's second-term election have made major central banks more cautious in setting interest rate policies. To safeguard their sovereign currency exchange rate trends and long-term domestic economic growth, the monetary policy paths among different central banks continue to diverge.
Forecast data from Bloomberg Economics show that within the next year, the central banks issuing the world's most heavily traded sovereign currencies will adopt a variety of different interest rate paths, while uncertainty in US policy and intense pressure from Washington will persistently test the confidence of central bank policymakers in their monetary policy decisions.
Excluding the US, the composite interest rate indicator for developed economies compiled by Bloomberg Economics is expected to remain largely unchanged by the end of the year, highlighting how fragmented monetary policies among developed economies may become, with these economies no longer following the Fed's monetary policy shifts.
Although major central banks are no longer blindly following the Fed, the Fed’s monetary policy is likely to become more prominent than usual. Its policymakers will carefully weigh the mixed signals from the US economy while also facing the prospect of a new chair selected by a president who openly advocates aggressive rate cuts and criticizes the Fed's current policy path.
It is understood that the "rate-cut tug-of-war" between Trump and Fed Chair Powell has escalated comprehensively. Fed Chair Jerome Powell stated that the US Department of Justice has issued a grand jury subpoena to the Fed, threatening criminal prosecution over his testimony in the US Congress in June 2025 regarding the ongoing renovation work at the Fed's headquarters. "All of this is a pretext," Powell said in a statement published on the Fed's official website. "The threat of criminal charges is because the Fed sets benchmark interest rates based on our professional judgment of what best serves the American public, rather than following the preferences of the US president."
This unprecedented move by the Trump administration marks a full escalation of the long-standing dispute and rate-cut tug-of-war between Trump and the Fed Chair. Upon returning to the White House, Trump has long called for substantial rate cuts, even urging that rates be slashed to 1% or lower. The current US benchmark interest rate—the Fed's federal funds rate target range—stands at 3.5%–3.75%. Additionally, the Trump administration has attempted to dismiss another Fed governor—an action currently under review by US courts.
In an interview with *The New York Times* last week, Trump stated that he had decided on a candidate to replace Powell as Fed Chair and is expected to announce his decision soon. Trump's chief economic adviser—Kevin A. Hassett, a "super-dove" who, like Trump, advocates aggressive rate cuts—is the leading candidate for the top position. Although Powell's term as chair ends in May, his term as a Fed governor will last until January 2028. Powell has not disclosed whether he plans to remain at the Fed beyond this year.
The US prosecutor's investigation of Powell highlights the broader conflict between Trump and the Fed. Other attacks include attempts to remove Fed Governor Lisa D. Cook, whom Trump tried to fire on grounds of mortgage fraud allegations. The president can only remove Fed officials "for cause," which typically means misconduct or neglect of duty. It is understood that the US Supreme Court will hear arguments in Ms. Cook's case on January 21. Congress has granted the Fed the authority to set benchmark interest rates based on an independent environment, free from presidential intervention, because the political fate of a US president is often closely tied to the actual state of the US economy.
Global Central Banks' "Monetary Policy Mêlée": Rate Cuts, Hikes, and Long-Term Inaction
Economists at Bloomberg Economics generally predict that the Fed's easing policies will exceed the market's common expectation of two cautious rate cuts in 2026. Overall, the Fed will maintain policy flexibility in an uncertain economic environment.
The latest December nonfarm payroll data was just right—exactly what the market wanted to see. It reflected that the US economy remains resilient, posing no negative disturbance to expectations of a "soft landing" for the US economy, while also not altering market expectations for Fed rate cuts. The interest rate futures market still prices in the likelihood of the Fed cutting rates two to three times in 2026, higher than the median expectation indicated by the FOMC dot plot, which shows only one rate cut.
Additionally, economists expect Canada, Japan, and Switzerland to announce sustained rate hike paths, while the Eurozone is more likely to keep its benchmark monetary policy rate unchanged for an extended period. Australia and New Zealand may announce further significant rate cuts. The once highly synchronized global monetary policy trajectory may begin to show significant divergence. Meanwhile, emerging market economies from Brazil to Nigeria are expected to implement substantial rate cuts.
Economists at Bloomberg Economics unanimously believe that the world's most important central bank—the Fed—may announce larger-than-expected rate cuts, primarily because the nonfarm payroll data shows signs of weakness in the US labor market, although it has not entered a long-term contraction phase, potentially eroding the Fed's hawkish monetary policy sentiment. However, other major central banks may not follow the Fed's potential aggressive rate cuts, mainly because their previous rate-cutting cycles were more aggressive than the Fed's, and inflation could rebound at any time. For example, the Bank of England (BOE) will implement much smaller rate cuts, the European Central Bank (ECB) may halt rate cuts for an extended period (i.e., maintain core monetary policy unchanged), and the Bank of Japan (BOJ) may move in the completely opposite direction in terms of monetary policy.
