Europe shifts to easing while Fed warns of U.S. inflation spike
Central banks in Switzerland and Norway cut interest rates on Thursday, citing falling inflation and a weaker growth outlook — moves that stand in contrast to the U.S. Federal Reserve’s more cautious stance. The Swiss National Bank lowered its key rate by 25 basis points to zero and hinted at the possibility of returning to negative rates. Norway followed with a surprise 25-point cut, signaling more to come as inflation slowed to 2.8% in May.
“We now expect lower inflation than previously forecast,” said Norges Bank Governor Ida Wolden Bache, reflecting a dovish turn even from one of Europe’s most hawkish institutions. The move mirrors Wednesday’s decision by Sweden’s central bank, which also cut rates and indicated further easing could be on the table by year-end.
U.S. Fed holds steady amid tariff fears and economic uncertainty
In sharp contrast, the U.S. Federal Reserve left rates unchanged and expressed concern over rising inflation risks driven by President Donald Trump’s escalating tariff threats. Fed Chair Jerome Powell warned that higher import costs from new tariffs could push inflation up while also weakening global growth. “Tariffs will likely feed into consumer prices,” Powell said during a press conference.
The Fed expects U.S. GDP to grow just 1.4% in 2025, with unemployment rising to 4.5% and inflation ending the year at 3% — well above current levels. Despite signaling possible rate cuts in 2025, Powell stressed the outlook is highly uncertain and “data-dependent.” Trump, however, lashed out on Truth Social, blaming Powell for higher borrowing costs and insisting, “We should be 2.5 points lower.”
Global outlook diverges as geopolitical risks mount
Elsewhere, the European Central Bank has already made eight rate cuts in the past year, with a pause likely in July now that inflation has stabilized at 2%. Meanwhile, the Bank of England held rates steady but hinted at a “gradual downward path” as global unpredictability continues to shape policy decisions.
The Bank of Japan also maintained its ultra-low interest rates this week, emphasizing downside risks from U.S. tariffs and sluggish global demand. Governor Kazuo Ueda said the BOJ will proceed cautiously, especially with signs of slowing economic activity in key trade partners.
Trump’s trade stance fuels uncertainty in monetary policy
With Trump threatening to more than double some tariffs by July 9 if no trade deals are reached, central banks are weighing the inflationary risks for the U.S. against the deflationary risks for other economies. For now, U.S. consumers face a higher cost burden, while European and Asian economies brace for weaker exports and job losses.
The divide underscores the policy split in a world where trade volatility and geopolitical tensions are reshaping inflation trajectories. Whether global central banks stay on divergent paths will depend largely on how Trump’s tariff regime unfolds and whether energy prices surge due to ongoing Middle East conflict.
