Erik Norland, CME Group
At a Glance
- Lingering core inflation is complicating central banks’ efforts to balance growth and inflation risks.
- Futures curves suggest further rate cuts could be ahead for multiple countries.
2024 was a global turning point for monetary policy. After two years of massive policy tightening, central banks began to ease policy pretty much across the board. What might be in store for 2025?
Going into next year, futures curves for SOFR, Euro ESTR and analogous products on other markets, suggest that traders still see some room for further interest rate reduction in the U.S., the eurozone, the U.K., Australia and Canada. Recently, however, traders have curtailed these expectations for rate cuts.
While inflation is way down from its peak levels in 2022 and 2023, it has stopped falling in many countries and remains about 1-2% above pre-pandemic levels.
In the U.S. for example, core inflation has stabilized at around 3.3% for the past six months, while its pre-pandemic level was typically closer to the Fed’s target of 2%.
This creates a dilemma for the Fed and other central banks. On the one hand, they might like to cut rates further, especially if economic growth slows in response to their policy tightening in 2022 and 2023, which was the largest in over forty years. On the other hand, persistent core inflation might give them pause, especially if further rate cuts risk igniting second rounds of inflation later this decade.