Central bankers and policymakers are gathering for one of the world’s most significant economic forums this week. They are expected to be more divided than ever since the pandemic began.
For years, the Federal Reserve, the European Central Bank, and other developed-world counterparts have moved in near lockstep. When the initial shock of COVID-19 hit in 2020, they slashed interest rates and pumped liquidity into the system. Then, when it became clear that the ensuing inflation wouldn’t just disappear, they embarked on the most aggressive tightening campaigns seen in decades.

Monetary officials were on the same page at the ECB’s annual conference in Sintra, Portugal, as recently as a year ago, acknowledging that there was still much to be done to rein in inflation.
Today, inflation has eased but remains above the 2% targets, creating a growing rift among the central bankers as they weigh the risks of stubborn price pressures against the dangers of their economies slipping into recession. For investors, this divergence is creating a more volatile environment.

The ECB pulled the trigger on rate cuts two months ago, while the Fed has yet to move. The BOE acted on 1 August, but only after a close 5-4 vote within its monetary policy committee. Meanwhile, the Australian central bank’s governor recently cited criticism from both sides of the rate debate—some urging further tightening, others calling for easing.
Fed Chair Jerome Powell, who will speak on Friday at the Jackson Hole symposium in Wyoming, hosted by the Kansas City Fed, acknowledged last month that “forecasters have been consistently surprised.”
This year’s conference theme, Reevaluating the Effectiveness of Monetary Policy, will see central banks’ top brass grappling with how their decisions are transmitted throughout the economy. The meeting typically influences investor expectations and shapes global economic strategies.

With mixed signals coming from the U.S. economy—July’s jobs report was much weaker than expected, while retail sales outperformed—it’s becoming increasingly challenging to determine when and how much easing is appropriate. This uncertainty is reflected in the futures markets as Jackson Hole approaches.
Federal funds futures contracts are experiencing their highest volatility this year. Last week, 30-day realised contract volatility spiked to 1.86, the highest level since June 2023, when it surged following the U.S. regional banking crisis. The current figure is nearly triple the average dating back to 1991.

Following the July jobs report, which showed an unexpected rise in unemployment and triggered a stock market decline, traders began betting on a 50-basis-point cut at the Fed’s September meeting, or possibly even sooner. Futures contracts now suggest a more modest 25-basis-point cut is more likely.
An extreme example of the uncertainties facing central banks at this stage of the economic cycle emerged last week in New Zealand. The central bank there shocked observers by cutting rates after signalling just three months earlier that such a move would only happen next year.
The RBNZ’s abrupt change of stance raises significant questions about how the bank perceives the economy and its forecasts, which makes it hard to trust its judgments. More importantly, the flip-flop also means no one can be entirely sure what’s coming next.

The RBNZ episode came just a week after Japanese central bankers were forced to recalibrate their messaging quickly.
On 31 July, the Bank of Japan surprised some observers by raising its key rate by 15 basis points and including forward guidance in its monetary policy statement, signalling more hikes ahead. On 7 August, after a sharp decline in stocks and a rise in the yen, the BOJ sent a strong dovish signal by committing not to raise rates when markets are unstable.
In Europe, central bankers face a dilemma. Recent price data show a surprise increase in eurozone inflation to 2.6%, alongside indications that the economy is underperforming expectations. Officials forecast inflation to hit the 2% target by the end of 2025 but continue to highlight significant uncertainty.
Some policymakers, like Greek government official Yannis Stournaras, see weaker growth as further justification for easing, while others point out that inflation remains stubborn. Markets are currently pricing in two more rate cuts this year, with a 50-50 chance of a third.