Trump may have just killed rate cuts

AI Summary

The aftermath of Donald Trump's campaign and the ongoing Middle East conflict has shifted global central bank monetary policy, leading to expectations of prolonged higher interest rates worldwide. Bloomberg Economics forecasts increased borrowing costs due to inflation risks and geopolitical tensions, impacting markets through 2028.

Donald Trump’s war against Iran may be over, but the repercussions for global monetary policy are here to stay.With a shaky ceasefire largely holding following the US president’s onslaught in the Middle East, the path for central bank interest rates around the world has now shifted higher for years to come, according to Bloomberg Economics. Its forecasts for borrowing costs, compiled here, show trajectories elevated by as much as half a percentage point or more through 2028 compared with those envisaged before the war. That’s both on BE’s global gauge for rates, and its measure for advanced economies.132206194That outlook reflects evolving inflation risks, including those that might arise from the race to adopt artificial intelligence, which may yet subside. Even so, price momentum is still lingering from the energy shock caused by the closure of the Strait of Hormuz. With the dust settling from the conflict, BE’s forecasts showcase how the immediate cost-of-living impact on consumers and businesses will now be compounded by a period of more expensive loans and mortgages than might otherwise have been the case. Earlier this year, BE predicted the Federal Reserve’s rate would end up a percentage point lower by the middle of 2027, instead of the single quarter-point reduction currently envisaged. The European Central Bank is anticipated to hike again to a level half a point higher than originally envisaged, before then easing in due course. What Bloomberg Economics Says...“Burned by the post-pandemic inflation experience, central banks have generally talked tough on inflation. With price gains surging higher, if only briefly, willingness to walk back that hawkish rhetoric looks limited — our central bank speak indicators have generally stayed in hawkish territory even as oil prices have receded.”—Jamie Rush, director of global economicsBE’s outlook also suggests that the global economy is proving able to withstand more elevated borrowing costs, pointing to its capacity to weather repeated shocks. But given Trump’s appetite for disruption, with the war having followed last year’s campaign to raise US tariffs, that resilience will surely be tested again before long.132206230With that caveat in mind, here is the quarterly guide by Bloomberg Economics to the monetary policy of 23 central banks, accounting for a combined 90% of the global economy.GROUP OF SEVENUS Federal ReserveCurrent federal funds rate (upper bound): 3.75%Bloomberg Economics forecast for end of 2026: 3.75%Bloomberg Economics forecast for end of 2027: 3.5%Market pricing: Traders are betting on one full quarter-point hike with a 20% chance of second by year end.The Kevin Warsh era is under way at the Fed, and it’s likely to bring a slew of changes.Already, investors have dialed up expectations for rate hikes this year, after the new chairman emphasized the US central bank’s commitment to fighting inflation during his first press conference in June. About half of Fed policymakers expect at least one increase this year, according to their most recent projections.Warsh is also advancing a new communications strategy, including cutting forward guidance, meaning investors will have fewer signals about where policy is headed. It’s a potential sea change that carries both opportunities and risks, long-time watchers say.How the Fed manages its rate policy in the coming months could have big implications for the November US midterm elections. Inflation and affordability are priorities for many Americans, especially after the Iran war drove up energy and other prices. Trump has continued to call for lower rates, but it remains to be seen whether his hand-picked Fed leader gets the economic conditions to deliver them.The Fed will hold its annual Jackson Hole symposium in late August. Fed chairs have often used this forum to deliver big news, and Fed watchers will be keen to see if Warsh, who has promised “regime change” at the central bank and is assembling several task forces to scrutinize how it conducts monetary policy, will do the same.What Bloomberg Economics Says:“The Fed is likely to stay on hold for the remainder of 2026 as consideration of reforms by Warsh’s task forces provide a rationale for the increasingly hawkish committee to stay in wait-and-see mode. BE expects the Fed to resume cutting rates in the first half of 2027 as inflation subsidies and the productivity gains from AI become more apparent.”—Andrew Sacher132206252European Central BankCurrent deposit rate: 2.25%Bloomberg Economics forecast for end of 2026: 2.5%Bloomberg Economics forecast for end of 2027: 2%Market pricing: Swaps imply around an 80% chance of a 25-basis-point increase by year-end and price a full hike by early next year.Progress toward peace in the Middle East has granted the ECB time to assess its June decision to raise rates for the first time since 2023. US-Iran talks have triggered a steep pullback in oil prices that’s fed through to inflation, including underlying pr