Between the afternoon of July 31 and the evening of August 1, a whirlwind of central bank rate decisions unfolded across the globe in less than 32 hours, capturing the attention of financial markets

While the Federal Reserve has chosen to pause in its rate adjustments, the Bank of England has joined the ranks of those cutting rates, and Japan has surprisingly embraced a path toward raising ratesDiscussions surrounding these rate changes have shifted, illuminating the broader narrative: central banks worldwide are beginning to normalize their monetary policies after years of unprecedented measures

Federal Reserve: Increased Expectations for September Rate Cut

The Federal Reserve’s interest rate decision was highly anticipated and scrutinized by market participants

On July 31, coinciding with local business hours, the Federal Reserve concluded its two-day monetary policy meetingIt announced that the target range for the federal funds rate would remain unchanged at 5.25% to 5.5%, reaffirming its stance that a rate cut would not materialize until there was greater confidence in curbing inflationThis was the eighth consecutive meeting since September of the previous year in which the Fed chose to refrain from adjusting rates

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However, during the subsequent press conference, Fed Chair Jerome Powell seemed to suggest that the likelihood of a rate cut might now outweigh the potential for maintaining the current rate

Powell indicated during the press conference that, “Based on the overall assessment of the Federal Open Market Committee, the U.Seconomy is gradually approaching an appropriate moment for a rate cutSubstantial discussions surrounding a rate cut could occur as soon as the next meeting.”

Multiple indicators suggest that the Federal Reserve is likely to implement a rate cut during the September policy meeting, indicating a potential shift toward a new phase of normalization in its monetary policy

According to the CME Group's FedWatch tool, futures markets currently estimate a 100% chance that the Federal Reserve will lower rates by 25 basis points in September, with a 15% chance of a 50 basis points cutThe markets also anticipate further rate reductions at the Fed's upcoming meetings in September, November, and December, with a 74% probability that the target range will decrease to between 4.50% and 4.75% or lower by the end of the year

Analysts from Ping An Securities suggest that understanding the logic behind the Fed's potential rate cuts is more crucial than pinpointing the exact timingThey emphasize the need to view these expected cuts in the context of the "normalization" of monetary policy

Powell repeatedly referred to three aspects of normalization—normalizing the labor market, the economy, and monetary policy—as he expressed that the job market is returning to pre-pandemic levels, while the overall U.Seconomy remains strong yet not overly heatedDespite certain economic indicators showing discrepancies compared to pre-2019 levels, the overarching trend signifies a transition from a state of "abnormal" to a "normal" economic frameworkAs such, adjustments in monetary policy are necessary to align with this normalization process, leading to a gradual decrease in rates from their currently restrictive levels

Bank of England: First Rate Cut in Four Years

Both the U.S

and the U.Khave witnessed prolonged periods during which their central banks maintained elevated interest ratesWhile the Federal Reserve has opted to remain on the sidelines, the Bank of England has taken the initiative, setting the stage for a rate cut

On the evening of August 1, the Bank of England announced a 25 basis points reduction in its base rate, lowering it from 5.25% to 5%. This marks the first interest rate cut since March 2020, aligning with market expectations

Amid inflationary pressures, the Bank of England had held rates at a 16-year high of 5.25% since August 2023.

Currently, the inflation rate in the U.K

has receded to the Bank of England's target of 2%, but policymakers remain cautious, especially regarding persisting inflation within the service sector

During this recent meeting, five members supported the 25 basis points rate cut, while four opted to maintain the status quo, highlighting a near-even split between hawkish and dovish sentiments

Despite supporting the rate cut, Bank of England Governor Andrew Bailey cautioned against slashing rates “too quickly or too aggressively.” He stated, “The reduction in inflationary pressures allows us to lower rates today, but we must ensure that inflation remains subdued and watch carefully not to reduce rates too rapidly or extensively.”

Minutes from the meeting revealed that the Bank of England's approach to rate reductions would be gradual, without a clear indication of potential stabilization levels or the speed of rate adjustments

Consequently, external analysts predict that the Bank of England will refrain from further rate cuts next month, opting for a cautious approach to relaxing monetary policy to allow decision-makers time to ensure inflationary pressures are managed

However, the Bank of England's forecasts imply that the magnitude of cuts over the next three years will exceed current market expectationsThe market anticipates a decline in rates to 4.1% by 2025, dropping to 3.5% by 2026, with inflation expectations set at 1.7% in two years and 1.5% in three years

The recent action by the Bank of England mirrors movements by other central banks in developed economies

Central banks around the world are treading carefully in their efforts to lower borrowing costs while maintaining vigilance until inflation is fully under controlPrior to the Bank of England's decision, nations such as Switzerland, Canada, Sweden, and the European Central Bank had already embarked on cautious rate cuts, albeit not expecting a full return to the low-interest-rate policies that characterized the pre-inflation crisis

Bank of Japan: Raising Rates After 17 Years of Headwinds

The Bank of Japan has long stood out among the G10 central banks as an anomaly

Against a backdrop of rising inflation, the Bank of Japan raised its benchmark rate to 0.25% on July 31, marking a significant withdrawal from the stimulative monetary policies it maintained for most of the last 25 years

In March of this year, the Bank of Japan ended its negative interest policy, increasing the benchmark rate from -0.1% to a range of 0% to 0.1%. This decision ended a lengthy period of unconventional monetary measures and constituted the first rate hike since February 2007.

Prior to this year, Japan had steadfastly adhered to an ultra-loose monetary policy, starkly contrasting the approaches of global peers such as the Federal Reserve

Currently, Japan’s inflation rate exceeds the target of 2% and is on an upward trajectory, which prompted the Bank of Japan’s decision to enact a rate hike

In June, the consumer price index (excluding fresh food) rose 2.6% year-over-year, surpassing the 2% threshold for the 27th consecutive monthThe Bank of Japan's recent report forecasts that the CPI will maintain a growth rate of approximately 2% around 2026.

In its statement, the Bank of Japan asserted that further increases in policy rates may occur if future economic and price conditions align with its expectations

Nonetheless, this action may be more symbolic than practicalBefore the rate hike, the head of U.SBank of America Securities, noted that the impact of an increase on the economy would likely be minimalShe expressed concern that the central bank might continue to maintain an easing policy

Raising interest rates would increase costs on consumers and business loans simultaneously

Bank of Japan Governor Kazuo Ueda emphasized that the weak yen was one of the contributing factors to the decision to raise ratesOver the last few months, the Japanese Ministry of Finance has intervened in the foreign exchange market to stabilize the yen

Following its decades-long low, the yen has begun to strengthen as it is anticipated that the interest rate gap between Japan and other major economies like the U.Swill narrowFollowing the Bank of Japan’s rate hike, the yen appreciated against the U.Sdollar, reaching a four-month highFurthermore, the yield on newly issued two-year government bonds rose to its highest level in 15 years