The week ahead: Central banks give their verdict on Trump

Rarely is one man dominant for financial markets and for central banks, however, Donald Trump’s new economic policy means that he is centre stage as we wait to hear from a multitude of central bankers this week. Half of the G10 group of currencies have central bank meetings this week, including the Federal Reserve in the US, the Bank of England in the UK, the Bank of Japan, the Swiss National Bank and the Swedish Riksbank. Elsewhere, South Africa, Brazil, Russia and China will also announce their latest interest rate decisions.

The vast majority of central banks are expected to remain on hold. This week will be the first time that the world’s most important central bankers will collectively assess how President Trump’s trade policies will impact the global economy. We had a preview last week from ECB President Christine Lagarde, who said that there was a lot of uncertainty about the economic outlook, and that maintaining price stability in this ‘new era’ created by the US will be very hard for central bankers like herself.

This cautious tone is likely to be copied elsewhere, and only the Bank of Brazil is expected to raise interest rates this week, while the SNB in Switzerland is expected to cut rates. Rates in Brazil are expected to rise to a full percentage point to 14.25% from 13.25%, after annual inflation surged to 8.78% YoY in February, up from 7.27% in January, tariffs could add even more upward pressure to price growth. The highlight of the week will undoubtedly be the Federal Reserve, it will announce its rate decision on Wednesday 19th March. Below, we look at the Fed, the BOE and the BOJ, and give our assessment of what these meetings could mean for central banks, after a volatile few weeks for financial markets.

The Federal Reserve

The Federal Reserve will announce their interest rate decision on Wednesday 19th March. The market has priced in a zero chance of a rate change at this week’s meeting, where the Fed will also announce their latest economic data projections. The focus will also be directed on Fed governor Jerome Powell’s press conference, where his words will be parsed to see what it means for the Fed’s future policy path.

The Fed will also release its new Dot Plot, which will include FOMC members’ latest projections for interest rates in the Trump era. The last Dot Plot in December, saw expectations for a mild loosening of monetary policy in the coming years. The median forecast for interest rates for this year at 3.9%, in 2026 the median forecast was 3.35%, in 2027 it was just over 3.1%, and the long-term neutral rate was 2.85 – 3%. If these expectations are scaled up on the back of inflation risks emanating from President Trump’s trade policies, this could spook financial markets.

Last Friday’s University of Michigan inflation expectations data makes it more likely that the Fed will sound cautious about future rate cuts. 1-year inflation expectations rose to 4.9% from 4.3%, the highest level since 2022, and the longer-term outlook for inflation was also higher than expected. This could cause worries that inflation expectations are becoming de-anchored, which could push up the Fed’s expectations for interest rates in the next year.

Although this is not the first Federal Reserve meeting since President Trump was inaugurated, since the last FOMC meeting, Trump’s rhetoric on trade policy and his treatment of US’s allies and foes alike, has been dramatically scaled up. Global tariffs are in place on steel and aluminum, and there are tariffs on Chinese, Canadian, Mexican and EU imports to the US. Unrealized trade threats a month ago are now real problems for the global economy, and the Fed needs to manage uncertain growth and inflation outlooks at this meeting.

The end of the Fed put?  

The market will also want to hear about the Fed’s views on the stock market sell off. US stocks staged a decent recovery rally on Friday, with the S&P 500 and the Nasdaq both rising more than 2%. However, both of the main US indices posted losses for last week, and the Nasdaq 100 is in a technical correction after falling more than 11% in the past month. The market will be looking closely at this week’s economic data, including retail sales data on Monday, the Fed meeting, and an update from Nvidia CEO Jensen Huang at this week’s GTC developer conference on the future of AI, to see if the market can put in a solid bottom for equity prices that could attract bargain hunters back into the market.

Some think that event risk this week means that volatility will be elevated, which could trigger another sell off, for example if retail sales are weaker than expected, or if the Fed’s Dot Plot suggests a more hawkish outlook for interest rates. The main US indices notched their 4th consecutive losing week last week, and the Dow Jones had its worst week since 2023. The question now is, will this week’s data and Fed meeting allay concerns or trigger more downside volatility?

The Fed is caught between a rock and a hard place. There can be no denying that the US economy is rapidly losing momentum. There has also been a flurry of corporate earnings downgrades including American Airlines, Delta and Southwest, and retailers including Kohl’s and Dicks Sporting Goods, both expect 2025 to be challenging for US consumers. This is why the economic data cycle will be extremely important to see if stocks can stage a decent recovery at some stage this month.

The Fed needs to be wary of inflation risks, alongside the growth outlook. We think that this means that stock investors’ hopes of a Fed Put, limiting the downside for US equities, will be dashed. Jerome Powell is likely to mention the heightened volatility of recent weeks, however, we think that he will back away from explicitly sating that the Fed will support the stock market if it falls to a certain level. Will the market fight the Fed and force them to step in? We will have to see. There are several analysts who think that the decimation of consumer confidence in the US and the growth outlook are worse than Covid times when the Fed did support the market. However, with US CPI above 2%, the prospect of the Fed also trying to prop up the stock market seems distant, in our view.

Nvidia: Huang set to fight back against the Chinese AI threat

Nvidia is also worth watching this week. Although the stock price is down 10% YTD, it staged an impressive rally last week and rose by 10%. At the GTC conference this week,  CEO Jensen Huang has a chance to assuage concerns about the outlook for AI and demand for his chips after an assault from Chinese models that have been made using a leaner model than US counterparts, and with less advanced Nvidia chips. The Golden Dragon index of US-listed Chinese tech firms is outperforming the Nasdaq 100 by the widest margin for more than a year. What Huang says about Nvidia, the lynch pin of the US AI trade, could determine if the Nasdaq 100 can extend the recovery from the end of last week and into the coming days.

The Bank of England

The BOE will be in focus this week. There is basically no chance of a rate cut at this month’s meeting, according to the swaps market. Traders are now convinced that the two further cuts expected this year will be accompanied by a Monetary Policy Report. There is currently a 75% chance of a rate cut in May, and a 55% chance of a cut in August.

Although the UK economy unexpectedly contracted in January, inflation concerns remain. Ahead of the BOE meeting on Thursday, the UK’s latest labour market report is released. This is expected to show stubbornly high wage data. Private wage growth is expected to show gains of 6.2% in the three months to January, while private and public sector wages excluding bonuses, are expected to remain elevated at 5.9%. It will be interesting to see if the BOE mentions any expected loosening in the labour market and an associated decline in wage pressure on the back of next month’s hike in employers’ National Insurance Contributions. Alongside Trump’s tariff threats, the burdens on UK businesses are set to soar in the coming months, which an interest rate cut could go someway to relieve.

The BOE is caution personified, so we assume that they will maintain a neutral stance at this week’s meeting. The pound extended gains vs. the USD overall last week, although it has backed away from the $1.30 level. Recession risk has been kryptonite for the FX market this year. As US recession risks have soared, the dollar has floundered. The link cannot be denied. However, this risk could also impact the pound. If the BOE hammers home the point about the fragility of the UK economy and the prospect of a recession, then the pound may weaken further, although $1.29 is a decent level of support in the short term.

The Bank of Japan

The Bank of Japan is expected to keep interest rates steady at this meeting, however, the prospect of more rate increases in the coming months are increasing. The market is expecting just over one rate hike this year, as the BOJ continues to normalize monetary policy, however the risk is that the market is behind the curve. Thus, a hawkish tone from the BOJ this week could see another surge higher in the yen and it may also be good news for Japanese equities.

The reason for a hawkish tone from the BOJ this week could be the surprisingly large increases in wages agreed during the annual spring negotiations between business managers and their workers. Pay rises were nearly 5.5% for the year ahead, one of the highest negotiated increases since the 1990s.

This could increase the chance that solid wage growth could boost inflation later this year. If the BOJ takes a hawkish stance at this meeting, then the yen may take this opportunity to extend gains vs. the USD after faltering at the end of last week and allowing USD/JPY to claw back some recent losses.

USD/JPY managed to bounce off a key resistance level, the 61.8% Fibonacci retracement level from the September low to the January high, at 147.15. Whether or not this pair can extend gains back to 150.00 will be dependent on the outcome of the US and Japanese central bank meetings this week.