Trump's Disrupting Tariffs Are Forcing More Central Banks Into A Wait-and-See Mode

Since re-entering the White House in January, U.S. President Trump has upended the global trade consensus and post-World War II international security framework. At the same time, he has also disrupted the normal functioning of the global central banking system.

This week has arguably been the most notable central bank super week since Trump 2.0 took office—over ten central banks, including those of the United States, Japan, the United Kingdom, Switzerland, Sweden, and Brazil, announced their interest rate decisions. The results revealed that monetary policymakers worldwide have been more or less thrown off course by the twists and turns of White House policies. Many central banks in easing cycles have tempered expectations for further rate cuts due to inflation anxieties triggered by tariffs.

Ask Aime: What impact will central banks' interest rate decisions have on the stock market?

Thierry Wizman, a strategist at Macquarie Group, noted that central bank governors are no longer the frontline spokespersons or pace-setters of macroeconomic policy. Instead, they have become followers—ceding the initiative to federal legislatures, executive offices, and diplomatic halls.

Federal Reserve Chair Jerome Powell, while keeping the federal funds rate target range unchanged on Wednesday, emphasized the uncertainty brought by Trump's tariff policies. Powell stated that it is difficult to analyze how much inflation is driven by tariffs, but the Fed will try to figure it out.

Powell believes it is too early to determine whether the inflationary impact of tariffs can be ignored.

The Bank of England subsequently abandoned its dovish bias on Thursday, and Sweden's Riksbank declared that its easing cycle had ended—citing the complexity of the international backdrop.

Despite the European Central Bank (ECB) cutting rates earlier this month, traders have reduced their bets on further action, now pricing in only a 50-50 chance of another rate cut next month.

Klaas Knot, a member of the ECB's Governing Council, noted that it is difficult to predict where interest rates are headed. He pointed out that due to tariffs, retaliatory measures, and increased infrastructure and defense spending across the EU, it is challenging to forecast whether eurozone inflation will rise or fall.

Tariffs have also placed heavy pressure on Asian central banks, including those of Japan and Indonesia—both of which kept rates unchanged this week. Bank of Japan Governor Kazuo Ueda told reporters after the central bank's decision on Wednesday: With high uncertainty surrounding U.S. and overseas trade policies, it is difficult to assess how far we are from achieving our goals.

Wait-and-See Approach

For now, the safest course of action for central banks seems to be to hold off on policy changes—the more uncertain the future, the greater the need to wait and see.

Political turmoil has undoubtedly clouded the global economic outlook. Earlier this month, the Organisation for Economic Co-operation and Development (OECD) downgraded its global growth forecasts for this year and next, citing rising trade barriers and policy uncertainties surrounding tariffs.

Slowing growth typically means central banks should accelerate rate cuts, but the complicating factor is that tariffs can also trigger inflation, which would require central banks to hike rates instead.

In fact, such stagflation scenarios are the last thing central banks want to see. In this macroeconomic environment, the economy stagnates or falls into recession under the weight of U.S. tariffs, but central banks find it difficult to stimulate the economy through rate cuts or other easing measures because inflation, which has persisted since 2022, continues to loom over the economy.

Maxime Darmet, Senior Economist at Allianz Trade, said: Soaring trade policy uncertainty has become a key concern for central banks, as it risks weakening economic activity substantially. The nasty combination of elevated trade policy uncertainty and high inflation put them in a tricky position.

Tariffs are undeniably growth negative for the global economy, said Jeffrey Schultz, Chief Economist for Central and Eastern Europe, the Middle East, and Africa at BNP Paribas. critically, a negative uncertainty shock - and I don't think any of that is particularly good news for emerging markets.

Notably, as the instigator of this series of disruptions, Trump has his own remedy for the Fed's next steps...

In a post on his social media platform Truth Social on Wednesday, Trump stated that as U.S. tariffs begin to gradually impact the economy, it would be much better if the Fed were to cut rates. Trump urged the Fed to do the right thing.

Earlier this month, during an address to a joint session of Congress, Trump stated that reciprocal tariffs would take effect starting April 2.

Judging from the volatility indicators in U.S. stock options, as this central bank super week comes to a close, there may indeed be no more important date in the next two weeks than Trump's so-called Liberation Day.