Since the liberalization of trade and the internationalization of financial markets, central banks have become major players in the choice and implementation of economic policy. They have different missions and statuses depending on the country or continent. Of all, it is the European Central Bank (ECB) that has the greatest freedom of action, thanks to its independence enshrined in its founding treaty and the definition of its mission in its statute, to reduce and maintain inflation in the euro zone to a level below but close to 2%. It can then act to support growth and employment.
The US Federal Reserve (Fed) is less bound by legal obligations but has also set itself a 2% target for inflation and had succeeded in getting the principle of its independence accepted, although it is not included in texts, until the re-election of Donald Trump. The US president's multiple statements calling for a rate cut while inflation remains above 3% now cast doubt on the institution's ability to maintain its independence. The entry into office of its next president, Kevin Warsh, a follower of the MAGA ideology advocated by the American president, will therefore open a new era for the institution.
The question of its independence does not arise for the Chinese central bank, which acts in strict accordance with government priorities. Inflation is extremely low and growth between 4.5 and 5% is in line with objectives. The mission entrusted to it for more than ten years is to advance the internationalization of the Yuan. Despite a reform of the financial markets, in both Shanghai and Hong Kong, it remains very slow. However, since the emergence of tensions with Washington, the central bank has gradually reduced the share of its reserves of dollar securities in favor of gold. This contributed to the fall in the dollar and the rise in interest rates on US debt since one of the main subscribers limited its contribution during issuance.
The economies of developed countries are facing, following Russia's invasion of Ukraine and then the Middle East crisis, a wave of inflation and, at the same time, a real risk of slowing down and sometimes even stopping growth. The term stagflation refers to a long-term situation during which, for structural reasons, a country, while maintaining high inflation, was unable to revive its activity. Today, these are external shocks that countries are facing and that are being asked to be addressed.
The Fed and the ECB in recent years have carried out parallel actions, which, even if it was not publicly admitted, must have been the result of their consultation. After a long period of very low rates, at the end of the Covid-19 crisis, from the 2nd quarter of 2021, their rates rose very sharply, reaching 4% in the euro area and more than 5% in the United States. The movement will stop in mid-2025 and these rates will fall to 2% and 3.5% respectively. The disruption of oil and natural gas supplies following the war in the Middle East has boosted inflation since the beginning of 2026 and is once again holding central banks to account, as the consequences of these events and the continuation of the conflict in Ukraine will inevitably weigh on economic activity.
They face an unprecedented dilemma: should they raise rates to curb rising inflation, or should they lower rates to support growth, including by promoting investment through lower borrowing costs? The debate will not be posed in the same terms on both sides of the Atlantic. But what is certain is that if interest rate spreads widen, it will have immediate effects on the foreign exchange markets. A more pronounced rate cut in the US than in Europe will cause the US currency to fall further.
Pressure on the Fed is not going to ease, especially in the run-up to the upcoming midterm elections in November. The appointment of the new president does not guarantee the implementation of a more accommodative policy. The twelve-member Monetary Policy Committee decides. However, contrary to an old practice that its members resigned when a new president arrived and were replaced by governors chosen by him, the current members decided to remain in place. US growth is still above 2% and the labour market with an unemployment rate of 4.3% does not seem to be affected by the international situation. The technical reasons for a rate cut are therefore not obvious, unlike in the euro area.
The dilemma in Frankfurt is not political but economic. Among the major economies in the Eurozone, only Spain in 2025 experienced significant growth. But inflation has risen well above 2%. Most of the states are heavily indebted. Raising rates would further weaken growth while increasing the burden of public debt. But lowering them at a time when its statutes require inflation to be brought below 2% would be difficult to understand by the financial markets, which would interpret this decision as an abandonment of monetary austerity, with all the consequences that this could have on the credibility of the institution.
In addition, the financial situation of the States, with the exception of Germany, does not allow them to adopt a budgetary policy aimed at supporting economic activity with, for example, a revival of public investment spending. How can the ECB get out of this dilemma? One possible way would be to return to a policy of "quantitative easing" consisting of buying public debt securities on the market or during issues with medium and long-term maturities. This would allow an easing of long-term rates that would be favourable to investment and help reduce the burden of government debt.
This practice was used during the Covid-19 crisis and then gradually abandoned when the health situation returned to normal. The ECB had initially limited its purchases to the volume of securities redeemed when they matured and then stopped all purchases. For the time being, both the ECB and the Fed are temporizing, with one buying time for a possible hike due to persistent inflation, the other seeking to maintain its credibility after the appointment of its new president.
But this situation cannot last forever. The war in the Middle East has caused a sharp rise in the price of fossil fuels. This was immediately reflected in households when they bought fuel. It will then affect production costs in industry, which will take longer to be transmitted to goods and services. Even if traffic in the Strait of Hormuz were to be restored, the persistence of tensions on supply chains following the establishment of tariffs by the US administration will be another inflationary factor that will affect Europe and the United States in particular.
The ECB and the Fed are therefore not done with the difficult choices to be made in terms of interest rates and monetary policy and with the dilemma between growth and inflation.