08/18/2025

This month, international markets are focused on the Jackson Hole meeting, an event that has taken on a symbolic role as a barometer of global monetary policy. This year, expectations are centered on the Federal Reserve and the possibility that September will bring a new interest rate cut. Investors are pricing in with near-total confidence a 25-basis-point reduction, but the reality of the data paints a much more nuanced picture.

Indeed, last week, U.S. inflation data painted a mixed picture, making the Fed’s outlook even more complex. The core Consumer Price Index rose in line with expectations but with a notable composition: the increase was concentrated in services, while goods showed mixed signs of tariff pass-through. At the same time, producer prices surprised to the upside, with a sharp 0.9% monthly rise in the core component, reflecting pressures in both goods and services. This contrast shows that, while the CPI didn’t spike, core inflation remains firm and could intensify in coming months. Meanwhile, the unemployment rate remains low and stable, and although job growth has moderated, there are no clear signs of serious deterioration in the labor market. In light of this, Jerome Powell’s warnings from July resonate strongly: there is no rush to ease conditions, and doing so too soon could overheat the economy and reignite inflationary pressures.

This contrast between market confidence and the Fed’s caution suggests that Jackson Hole could become a stage for clashing narratives. If Powell delivers a hawkish speech, the current euphoria could deflate quickly. Conversely, if he leaves the door open for a rate cut in September, the market will feel vindicated. The challenge is that financial conditions in the U.S. are relatively accommodative despite the nominal level of interest rates, which reduces the urgency for an immediate cut.

Europe faces a different, yet equally complex, dilemma. Leading indicators and surveys show some resilience, particularly in services, but industrial production and other real activity data point to a clear slowdown. Second-quarter growth barely reached one-tenth of a percent, and prospects for the third quarter look even gloomier due to weakness in the manufacturing sector, hit by falling external demand and the effects of tariffs. The European Central Bank, under Christine Lagarde’s leadership, maintains a cautious stance: it does not commit to a schedule of moves, but insists on evaluating the situation meeting by meeting. The sense, however, is that the ECB feels more comfortable staying on the sidelines than further easing policy.

In Japan, the outlook is very different. The economy grew strongly in the second quarter, driven by business investment and exports, despite the effects of tariffs. Upward revisions to GDP and the momentum from wage increases suggest that domestic demand will continue to support activity for the rest of the year. This, coupled with explicit pressure from Washington calling for a normalization of Japanese monetary policy to curb the yen’s weakness, puts the Bank of Japan in a position to raise interest rates again in October.

China, for its part, has become the major source of concern. July data confirmed that the slowdown is deeper than expected. Domestic consumption is losing momentum, investment is weakening, and industrial production is also starting to decline. Private credit demand is plummeting, prices are flirting with deflation, and the real estate sector continues to sink. Third-quarter growth is shaping up to be one of the weakest in recent years, and the risk of a vicious cycle between the real estate crisis, falling confidence, and weak consumption is increasingly tangible.

Against this backdrop, Jackson Hole goes beyond the academic and becomes a major political and financial stage. The Federal Reserve must decide whether to challenge the market and buy time until December, or yield to the pressure of expectations. The ECB will continue to play the ambiguity game, while Japan prepares to raise rates and China sinks deeper into uncertainty. The challenge over the coming months will be to strike a delicate balance: sustaining growth without reigniting inflation, in an environment where the credibility of central banks is as valuable as it is fragile.