Central bank governors are hesitant about sudden policy changes

Top central bankers from the world’s largest economies convene on Tuesday in Sintra, Portugal, to discuss monetary policy as markets prepare for the second half of 2025. Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde, and Bank of Japan Governor Kazuo Ueda join a panel discussion that began around 2:30 PM today.

Speaking during Monday’s opening, Lagarde reiterated that uncertainty was the biggest talking point for most global monetary authorities. Her remarks followed a quiet trading session in Europe, during which the US DXY Dollar Index fell by about 0.5%.

The White House confirmed President Donald Trump had sent a handwritten note to Powell calling for an immediate interest rate cut. Trump wants the Federal Reserve to reduce borrowing rates to near 1%. 

Press Secretary Karoline Leavitt told reporters on Monday that the president believed lowering borrowing costs could help bring the US economy back up. However, Federal Chair Powell said there is “no urgency” to begin cutting interest rates, arguing that the US economy is “in a good place right now.”

Trump’s economic agenda and Senate debate

President Trump’s administration is pressured to pass what he calls the “One, Big, Beautiful Bill,” an economic package currently stalled in the Senate. The POTUS is asking lawmakers to pass it before July 4, America’s Independence Day. 

During today’s address, Powell doubled down on his commitment to the Fed’s dual mandate and sidestepped speculation about his future. “I’m very focused on doing my job,” Powell said, a comment that received applause from the audience.

Addressing concerns about the federal debt, Powell warned that the current fiscal trajectory is unsustainable and will eventually need to be confronted. However, he stated that monetary policy is all about price stability and boosting employment.

When asked if he plans to stay at the central bank after his term as Chair ends in 10 months, Powell surmised, “I have nothing to say on that.”

Pressed for advice for a potential successor, Powell vowed to “stay out of political issues.” 

During his turn to speak, ECB President Lagarde said that scenario analysis could have helped the ECB better communicate the uncertainty around inflation forecasts following Russia’s invasion of Ukraine.

“In 2022, our baseline scenario projected 5.5% inflation, but a worst-case scenario showed more than 7%, which was much closer to the final outcome of 8%,” Lagarde explained. 

“Scenario analysis could have helped in illustrating that the range of possible inflation outcomes was unusually wide, and would have reduced the risk of projecting false certainty to the public.”

The comments came as the ECB released the results of its latest strategy review, which showed Euro area inflation fell to 1.9% in May, allowing the ECB to lower its benchmark interest rate from a peak of 4% to 2%.

Central bank governors are hesitant about sudden policy changes

Speaking to CNBC on Tuesday, BOE Governor Bailey said the UK’s labor market was showing signs of softening, which could help inflation return to target. While not committing to an immediate rate change, Bailey doubled down on the sentiment that interest rate reductions would likely occur gradually. 

“Any increase in inflation is an increase in inflation,” Bailey said, but added that policymakers are closely watching for signs of second-round effects that could entrench price pressures. “I am seeing some signs of some softening,” he continued.

Bailey reiterated that the longer-term trajectory for interest rates remains downward, despite near-term uncertainty. On the impact of trade tariffs, he said it was still too early to determine their full effect on consumer prices. Yet, he warned that tariffs could affect domestic demand and disrupt supply chains if prolonged.

BOJ Ueda: Headline inflation still above target

Bank of Japan Governor Kazuo Ueda told attendees that headline inflation has been above the central bank’s 2% target for nearly three years. “Underlying inflation is still below 2%,” Ueda stated. 

He noted that any decision to raise interest rates would depend on progress across three components of inflation dynamics, though he did not elaborate on specifics.

Ueda also confirmed that the BOJ’s current policy rate has gone below the estimated neutral level, which is more reason for the bank’s patient stance on policy tightening. 

On the issue of trade negotiations involving Japan, Ueda declined to comment, saying only, “Trade is being negotiated, and I try to stay away from that.”

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