08/25/2025

The annual Jackson Hole meeting once again placed the Federal Reserve in the international spotlight, and this time, Jerome Powell's change of tone marked a turning point in monetary policy expectations. After weeks of uncertainty about whether or not September would bring a rate cut, his statements tipped the balance in its favor. The Fed chairman acknowledged that risks to the labor market have increased, warning that they could generate rapid and nonlinear dynamics in the economy. Although he emphasized the persistence of inflationary pressures, his emphasis on the downside risks to employment was enough for the market to once again price in a high probability of a cut.

However, not everything is set in stone. The likelihood of a cut still depends on the data released in September, especially on unemployment and inflation. A decline in the unemployment rate accompanied by a significant rebound in the core CPI could keep the Fed divided and lead to a pause.

In parallel, the American central bank formalized a shift in its operational framework. Indeed, the Federal Reserve announced that it was abandoning the "average inflation" strategy that allowed it to tolerate prices above 2% for a time to compensate for previous periods of low inflation, and has returned to a more traditional approach: keep inflation at a stable level close to 2%, with no room for leniency. In practice, this means the Fed will be more stringent: it will act quickly if it perceives that inflation is consolidating above the target, even if this means cooling the economy and moderating employment. Adding to this debate is direct political pressure from the White House, with attacks on members of the Federal Reserve, which increases institutional uncertainty.

Meanwhile, in Europe, the European Central Bank appears inclined to keep rates unchanged in September. Inflation has stabilized around 2%, and recent activity indicators, such as the August PMIs, rose unexpectedly. However, the background remains fragile: Germany has revised its second-quarter GDP downward, reflecting weakness in domestic demand, and European consumer confidence deteriorated again in August. Christine Lagarde is likely to maintain the narrative of decisions from meeting to meeting, avoiding committing to a clear path. In the United Kingdom, the Bank of England faces a more complex situation. Recent inflation data rose unexpectedly, eroding the scope for continued rate cuts each quarter. The improvement in activity indicators and the strength of inflation in services cast doubt on the central bank's ability to maintain this pace of easing. For its part, the Bank of Japan is moving in a different direction: everything points to a possible rate hike in October, supported by the persistence of high core inflation.

The commercial front is another scene of transformation. The agreement reached between the United States and the European Union at the end of July has been further detailed: Washington will allow a 15% cap on sectoral tariffs provided Brussels eliminates its own levies and opens preferential access in sensitive sectors. In contrast, negotiations with India have stalled amid tensions over Russian oil imports. With Canada, however, progress is being made, following the Ottawa government's willingness to withdraw retaliatory measures. Regarding China, the tariff pause has been extended, consolidating a status quo that Washington considers satisfactory.

Despite these ups and downs, global trade remains surprisingly stable in aggregate terms, but with a profound change in its composition. Exports to the United States have fallen for most major trading partners—China, Japan, South Korea, and the European Union itself—while sales to other destinations are increasing. Mexico and Vietnam, for their part, stand out as net winners in this reorganization.

In parallel, the war in Ukraine continues to influence the international agenda. Following the summit between Donald Trump and Vladimir Putin, negotiations continued with the participation of Zelensky and European leaders in Washington, but positions remain distant. Moscow has agreed to freeze the frontlines in some areas, although it insists on the withdrawal of Ukrainian troops from part of the Donetsk region. Regarding security guarantees, the US proposal is ambiguous, with air commitments but no ground presence, while Russia categorically rejects any deployment of NATO troops on Ukrainian soil.

In short, the current picture is of a world in transition, with US monetary policy shifting back toward stimulus, Europe navigating between price resilience and weak growth, and Asia reshaping its role in global trade. All of this under the shadow of a war in Eastern Europe that still has no solution.