As President Trump advances significant fiscal policy and trade structure changes in his second year back in the White House, while frequently threatening the Federal Reserve's monetary policy independence and persistently demanding aggressive interest rate cuts, the interest rate paths of global central banks are beginning to diverge. Major central banks worldwide are adopting distinctly different monetary policies to stimulate economic growth when confronting the economic uncertainty and severe market volatility triggered by U.S. fiscal or monetary policy under Trump's leadership, rather than uniformly following the Fed's policy shifts. According to the latest economist forecasts from Bloomberg Economics, the monetary policies of the world's major economies, both developed and developing, are likely to be less synchronized over the next two years compared to recent years. With the post-COVID global easing and monetary policy tightening cycles largely concluded, the interest rate paths of the world's most significant monetary economies will exhibit an increasingly diverse trend in the near future. As indicated, the monetary policy paths of the G-10 developed nations will show significant divergence.
Since the "Trump Variable" – the core influencing factor encompassing the Trump administration's aggressive tariff hikes on foreign countries, threats to Fed independence demanding substantial rate cuts, and the specific evolution of these global market-facing policies – emerged following Trump's return to the White House after winning the 2025 presidential election, it has become the paramount factor constraining the operational space for global central bank policies and influencing global stock market trends. Trump's policies and the direction of the U.S. economy and politics are impacting central bank decision-making expectations, particularly concerning the future path of Fed monetary policy, rate cut expectations, and political pressure. These issues undoubtedly exert a significant influence on the monetary policy interest rate paths within the global central banking system. It is precisely the economic uncertainty and "economic haze" brought by Trump's election to a second term that are causing global central banks to approach interest rate policy formulation more cautiously. To safeguard their sovereign currency exchange rate trends and ensure long-term domestic economic growth, monetary policy paths among different central banks continue to diverge.
Bloomberg Economics forecast data suggests that within the next year, central banks issuing the world's most heavily traded sovereign currencies will pursue a variety of different interest rate paths, while U.S. policy uncertainty and intense pressure emanating from Washington will persistently test the monetary policy confidence of central bank decision-makers. Excluding the United States, Bloomberg Economics' composite interest rate indicator for other developed economies is projected to remain largely unchanged by year-end, highlighting how fractured monetary policy among developed economies may become, as they cease to follow the Fed's policy moves. Although major central banks are no longer blindly following the Fed, the Fed's monetary policy may become more conspicuous than usual. Its policymakers will carefully weigh mixed signals from the U.S. economy while also facing the prospect of a new chair being selected by a president who publicly advocates for large rate cuts and is critical of 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 U.S. Department of Justice has served the Fed with a grand jury subpoena, threatening criminal prosecution related to his testimony before Congress in June 2025 concerning the ongoing renovation work at the Fed headquarters. "All of this is pretext," Powell said in a statement published on the Fed's website. "The threat of criminal charges is because the Fed sets the benchmark rate based on our professional judgment of what best serves the American public's interest, not by following the U.S. President's preferences." This unprecedented move by the Trump administration marks a full-scale escalation of the long-standing dispute and rate cut tug-of-war between Trump and the Fed Chair. Trump, upon returning to the White House, has long called for significant rate cuts, even advocating for rates to fall sharply to 1% or lower. The current U.S. benchmark rate, the Fed funds rate target range, is 3.5%-3.75%.
Furthermore, the Trump administration is attempting to dismiss another Fed Governor – a move currently under review by U.S. courts. Trump stated in an interview with The New York Times last week that he has 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 for substantial rate cuts, is a leading candidate for the top position. Although Powell's term as Chair ends in May, his term as a Fed Governor continues until January 2028. Powell has not disclosed whether he plans to remain at the Fed beyond this year. The U.S. prosecutor's investigation into Powell underscores the broader conflict between Trump and the Fed. Other attacks include attempts to remove Fed Governor Lisa D. Cook, whom Trump sought to dismiss based on mortgage fraud allegations. The President can only remove Fed officials "for cause," which typically implies malfeasance or neglect of duty. It is understood that the U.S. Supreme Court will hear arguments in Ms. Cook's case on January 21st. Congress granted the Fed the power to set benchmark rates within an independent environment, free from presidential intervention, because a U.S. President's political fortunes are often closely tied to the actual state of the U.S. economy.
Bloomberg Economics economists generally predict that the Fed's easing will exceed market expectations of two cautious rate cuts in 2026, and overall, the Fed will maintain policy flexibility within an uncertain economic environment. The recently released December non-farm payrolls data were just right – exactly what the market wanted to see – reflecting that the U.S. economy remains resilient without negatively disturbing expectations for a "soft landing," while also not triggering changes in market expectations for Fed rate cuts. Interest rate futures markets still price in two to three Fed rate cuts for 2026, higher than the median expectation of just one cut indicated by the FOMC dot plot. Additionally, economists anticipate that Canada, Japan, and Switzerland may 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, however, might announce further significant rate cuts, suggesting that the once highly synchronized global monetary policy trajectory may begin to show marked divergence.
Simultaneously, emerging market countries from Brazil to Nigeria are expected to implement substantial rate cuts. Bloomberg Economics economists generally agree that the world's most important central bank, the Federal Reserve, might announce more significant rate cuts than market expectations, primarily because non-farm payroll data, while not indicating a long-term contraction, show signs of weakness in the U.S. labor market that could erode the Fed's hawkish monetary policy sentiment. However, other major central banks are unlikely to emulate potential large-scale Fed rate cuts, mainly because their previous easing cycles were more aggressive than the Fed's and inflation could rebound comprehensively at any time. For instance, the Bank of England's rate cuts are expected to be much more modest, the European Central Bank may pause cutting rates for an extended period (i.e., keeping core monetary policy on hold long-term), and the Bank of Japan may move in the completely opposite monetary policy direction.
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