A look at the rate paths of major central banks in response to the uncertainty around US tariff policy. Many central banks are in a wait-and-see mode, looking for clarity with regard to tariff policy.
Central banks’ monetary policy and the response to Trump’s tariffs
After the start of the COVID pandemic in 2020, there was a global surge in inflation during the years 2021-2022. The world’s major central banks responded by sharply raising interest rates in order to contain inflation, which hit 9.1% in the United States, 10.6% in the eurozone, and 11.1% in the United Kingdom.1
Inflation rates peaked in 2023 and then declined sharply. The major central banks, including the US Federal Reserve, maintained interest rates for a prolonged period in order to keep inflation in check and then began to lower rates in late 2024 as inflation continued to ease. This easing cycle hit some headwinds when newly elected President Trump made good on his presidential campaign pledge to impose wide-ranging tariffs on US trading partners in April 2025.
Tariffs and counter-tariffs
A number of key trading partners of the US, including China, Canada and the European Union, have retaliated against the A number of key US trading partners, including China, Canada, and the European Union, have retaliated against the US tariffs by imposing counter-tariffs on US goods. The US and China, the two largest economies in the world, imposed massive tariffs on each other, with the US imposing tariffs of up to 145% on Chinese products and China responding with tariffs of up to 125% on US products.
The tariffs and counter-tariffs sent the financial markets on wild swings and have created uncertainty about their impact on global trade. The central banks, which, like the financial markets, prefer certainty and predictability, have two major problems to contend with regarding President Trump’s tariffs.
First, the tariffs, which are effectively a back-door tax, have raised the prices of imported products. This boosts inflation, while at the same time weighing on growth and raising unemployment.
Second, US trade policy, particularly tariffs, has been completely unpredictable. The escalation in the trade war with China was suddenly reversed when Trump announced in May 2025 a 90-day deal which would reduce US tariffs on China to 30% and reciprocal tariffs to 10%, while the sides continued to try and negotiate a permanent agreement. Shortly afterwards, Trump threatened to impose a 50% tariff on European Union goods, but suddenly changed course two days later and announced that the tariff would be temporarily suspended to allow for negotiations.2
US/China tariffs 2025 chart. Source: Statista. Past performance is not indicative of future results.
These “tariff truces” indicate a reduction in trade tensions on the one hand but also highlight the unpredictability of US trade policy, as Trump can impose tariffs and rescind them at any time. This has made it very difficult for central bank policymakers to come up with forecasts for inflation and growth, since Trump could upend the forecasts at any time by deciding to impose or rescind tariffs on a particular country. This has muddied the waters for central banks concerning monetary policy, which depends heavily on inflation and growth projections.
How have central banks responded to the economic uncertainty of tariffs?
President Trump’s erratic trade policy has created tremendous geopolitical uncertainty and made it challenging for central banks to chart a rate path. In recent months, this has led to a “wait-and-see” stance from central bankers, many of whom have publicly expressed concerns over the US tariffs and the economic uncertainty they have created.
The response has been a suspension of rate cuts from some central banks and a slower pace of cuts from others. Thus, the tariffs have put a stick in the spoke of central banks' easing cycles, which means that relief in the form of interest rate cuts has been delayed by Trump’s tariff policy.
The Federal Reserve’s dual mandate
The Federal Reserve has a dual mandate for monetary policy, which is achieving maximum employment and stable prices. Through its monetary rate policy, the Fed aims to maintain interest rates at a level that supports growth without causing inflation. Since these two goals can often conflict with each other, Fed policymakers often find themselves making a trade-off - for example, raising interest rates in order to contain inflation can dampen economic growth and lead to higher unemployment.
In recent months, Fed Chair Powell has focused on the Fed’s dual-mandate goals. With inflation generally under control but growth weakening, the Fed’s rate path remains unclear. The Fed has been in a wait-and-see stance and hasn’t made a rate move since November. 2024. Powell has faced pressure from US President Trump to lower rates, but has insisted that the Fed needs more clarity on the impact of US tariffs on inflation and growth before delivering a rate cut.
Other central banks
The European Central Bank and Bank of England would like to further lower rates in order to boost economic growth, but the uncertainty created by US tariffs and counter-tariffs on US products have made it difficult for central banks to chart a rate path.
The Bank of Japan, an outlier that has signaled that it plans to move in the opposite direction and raise interest rates, has been forced to put those plans on hold due to the uncertainty over US tariffs.
Growing uncertainty amid Trump’s tariffs
President Trump’s erratic tariff policy has included imposing and suspending tariffs, causing uncertainty among the US’s trading partners. Tariffs raise inflation and dampen growth, and many central banks have adopted a wait-and-see stance as they are finding that they cannot rely on their “bread and butter”, namely, inflation and growth forecasts, as they try to chart a rate path in a period of growing economic uncertainty.
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