Luis de Guindos, Vice President of the European Central Bank, recently warned that the economic uncertainty brought by the Trump administration is even greater than that of the COVID-19 pandemic.

He specifically pointed out that Trump's tariff policies, deregulation plans for the financial system, and intentions for corporate tax reforms have not only aggravated market volatility in the short term but also posed profound challenges to inflation expectations and interest rate paths. This statement seems to set the background for the upcoming 'Super Central Bank Week' next week.

Next week, global central banks will welcome the highly anticipated 'Super Week,' during which major global central banks, including the USA, Japan, and the United Kingdom, will hold consecutive monetary policy meetings.

Amid escalating risks of global trade friction and the ambiguous policy direction of the USA, the policy decisions of the central banks of the USA and Japan will undoubtedly become the focal point under the spotlight.

Meanwhile, several central banks, including those of the United Kingdom, Swiss Franc, and Sweden, will also intensively announce interest rate decisions, but the market generally expects that under the global 'Trump shadow,' 'caution' and 'wait-and-see' may become the common policy 'keywords' for various central banks.

Federal Reserve: Patience in the face of uncertainty?

Under the uncertainty brought by Trump's policies, Morgan Stanley analysts expect the Federal Reserve to maintain the federal funds rate unchanged at 4.25%-4.5% in the March policy meeting. Chairman Powell may continue the 'patient' stance of 'no rush to act' since the January meeting.

Morgan Stanley also expects that in the press conference following the interest rate meeting, Chairman Powell will take a cautiously optimistic view of economic growth and deflation, but will emphasize that the Federal Reserve will remain patient. Morgan Stanley believes that the future direction of monetary policy will depend on policy choices that have yet to be made and their combined effects, so the Federal Reserve will not rush to act.

In addition, Morgan Stanley expects the Federal Reserve will discuss the issue of balance sheet reduction (quantitative tightening, QT) in depth. The report mentions that the meeting may involve the timing and manner of ending QT to ensure the smooth operation of the financial markets. This discussion will be one of the focal points of market attention.

(1) Economic data and forecasts

Morgan Stanley noted that recent economic data showed a slowdown in growth, with signs of easing inflationary pressures. However, short-term data fluctuations are far from enough to change the Federal Reserve's policy direction, and future data will be more crucial for the Federal Reserve's policy determination.

In the updated Summary of Economic Projections (SEP), Morgan Stanley expects the Federal Reserve to make the following adjustments:

• Economic growth: This year's economic growth forecast will be slightly revised downwards, partly due to the drag on the economy from reduced immigration.

• Inflation: The inflation expectations for this year and next will be slightly revised upwards, but will still be close to the 2% target.

• Unemployment rate: It is expected to remain near the current low level, indicating resilience in the labor market.

Based on these forecasts, Morgan Stanley believes that the Federal Reserve's policy path will remain stable, expecting two rate cuts this year (bringing the rate down to 3.9%) and another two cuts next year (down to 3.4%). Long-term rate expectations (long-run dot) will also remain unchanged. This prediction reflects the Federal Reserve's cautiously optimistic attitude towards the economic outlook while emphasizing data dependence.

The 'dilemma' of the Bank of Japan.

If the Federal Reserve's 'patience' reflects more of a strategic wait-and-see approach, then the Bank of Japan is more caught in a 'dilemma.'

Facing external risks brought by Trump's policies, the Bank of Japan also needs to weigh the nascent signs of recovery in the domestic economy against the process of normalizing monetary policy.

For Japan's economy, which is highly dependent on exports, the trade policies of the Trump administration are undoubtedly a looming 'Damocles sword.' If the Trump administration once again wields the tariff stick, or if the global economy is dragged into a recession because of this, Japan's economy will be hit hardest and suffer significant shocks. At that time, the Bank of Japan's previous cautious normalization efforts may face the risk of being aborted.

Regarding the upcoming monetary policy meeting of the Bank of Japan, Governor Ueda Kazuo's statements at the post-meeting press conference will be particularly crucial. The market will closely observe how he assesses the risks posed by Trump's trade policies to the Japanese economy and whether the Bank of Japan will change the pace and timetable of future rate hikes.

(1) The 'tug-of-war' between domestic improvement and external risks.

The Bank of Japan just decisively ended its years-long negative interest rate policy in January this year and made its first rate hike in over a decade, an action that had been interpreted by the market as a signal of a turning point for the Japanese economy. At that time, the market generally expected that if Japan could maintain its recovery momentum, the Bank of Japan might raise rates again within the year and achieve monetary policy normalization.

However, the sudden changes in the external environment, especially the unpredictability of the Trump administration's trade policies, have once again blurred the originally clear policy path of the Bank of Japan. Ueda Kazuo stated in the Diet that he is optimistic about the recovery of Consumer spending, but is 'very concerned' about the uncertainties in the overseas economic development.

On one hand, there are indeed some positive signs emerging in the domestic economy of Japan. For instance, large enterprises have significantly raised salaries for the third consecutive year, and the inflation rate in January rose to 4%, a two-year high, further solidifying market expectations for sustained inflationary pressure in Japan, providing ample reasons and room for the Bank of Japan to further raise interest rates.

On the other hand, the lingering global economic downside risks, particularly the unclear prospects of the USA economy, have made it necessary for the Bank of Japan to think twice with every step it takes. According to sources cited by the media from the Bank of Japan:

"The escalating global uncertainties are concerning and may affect the timing of the Bank of Japan's interest rate hike."

Hiroki Shimazu, chief strategist at MCP Asset Management Japan, stated:

"If the US stock market undergoes significant adjustments again, the Bank of Japan may delay the next interest rate hike."

A Reuters survey also indicated that more than two-thirds of economists expect the Bank of Japan to raise interest rates to 0.75% in the third quarter, with the most likely timing being in July. This to some extent reflects the market's basic expectations for interest rate hikes by the Bank of Japan within the year, but it also suggests that in the context of increasing unpredictability in the global economy, the Bank of Japan will not be in a hurry to pull the 'trigger' for a rate increase.

"Caution" has become the main tone, and "wait and see" has become the key phrase.

The cautious stance of the Federal Reserve and the Bank of Japan is not an isolated case, but a common choice among global central banks in the current complex economic environment.

Media forecasts that in the upcoming "Central Bank Super Week," several central banks including the Bank of England, Swiss Franc Central Bank, Swedish Central Bank, South African Reserve Bank, and Central Bank of Russia are expected to remain still, maintaining the current interest rate levels.

As ECB President Lagarde emphasized earlier, "We are indeed facing very high uncertainty."

As the global economy faces multiple challenges, particularly under the backdrop of uncertainties brought by the "Trump policies," "caution" and "wait-and-see" have undoubtedly become the common policy "keywords" for global central banks.

Editor/Somer