HUGO PATRICK BOLGER
Ireland
5m
The Federal Reserve and the Bank of England have taken diverging paths on monetary policy, reflecting differences in their domestic economies and inflation outlooks. On September 17, 2025, the Fed lowered its benchmark interest rate by 25 basis points to a range of 4.00 to 4.25 percent. This marks the first reduction since last December and signals the beginning of a gradual easing cycle. The Fed’s projections suggest that at least two more cuts are likely before the end of the year, with markets expecting moves in October and December. In contrast, the Bank of England opted to hold its rates at 4 percent, while at the same time slowing the pace of quantitative tightening by scaling back gilt sales and shifting away from longer-duration maturities. The economic backdrop explains much of this divergence. In the United States, the labour market, which for years had been exceptionally strong, is showing signs of cooling. Job creation has slowed, unemployment has ticked up, and Fed officials increasingly see risks that employment will weaken further. At the same time, inflation remains above target. While it has eased from last year’s peaks, underlying measures such as core inflation are still elevated, leaving the Fed cautious. Economic growth is also moderating, with consumer spending and business investment softening. These dynamics pushed the Fed to begin cutting rates, but Chair Jerome Powell has emphasized that future moves will be data-dependent. In the United Kingdom, the story looks different. Inflation in August was still close to 3.8%, far from the 2% target. Wage growth is running strong, and cost pressures from energy and labour markets remain high. Although growth is weak and labour market indicators are starting to soften, the persistence of inflationary pressures makes policymakers hesitant to cut. Holding rates steady allows them to maintain pressure on prices, even if it risks dragging further on growth. The decision to moderate quantitative tightening is a signal that the BoE is trying to manage financial conditions more carefully without fully pivoting toward easier policy. Across the euro area, the European Central Bank has also paused rate changes. Inflation is generally trending lower, but not uniformly, with food and energy prices proving sticky. Growth remains subdued, and policymakers are wary of both downside risks from weak global demand and upside risks from renewed price shocks. As a result, the ECB is keeping its options open but moving cautiously. Powell’s comments after the Fed meeting highlighted the tension central banks face. He noted that the labour market is no longer running hot and that job creation has fallen below the pace needed to keep unemployment from rising. He acknowledged that risks to employment have increased, a notable shift in emphasis after years of focusing primarily on inflation. At the same time, he stressed that inflation remains above the Fed’s 2% target and that monetary policy cannot afford to ease too aggressively until price stability is secured. His message was clear: the Fed will cut further if the labour market weakens and inflation continues to ease, but it is not embarking on an unconditional easing cycle. Looking ahead, the likely paths diverge. The Fed appears set to deliver two more cuts this year, but will move cautiously in 2026 unless inflation falls closer to target. The BoE, by contrast, may wait longer before reducing rates, possibly into early 2026, as it needs clearer evidence that inflation is on a sustainable downward path. The ECB is likely to remain cautious, allowing gradual disinflation to play out before taking decisive action. In the bigger picture, both sides of the Atlantic are facing the same dilemma: inflation is still too high, but labour markets are cooling and growth is weakening. The balance of risks has shifted, but not decisively. That leaves central banks in a data-dependent mode, easing only as far as incoming evidence allows. The Fed’s cut signals the start of cautious easing, while the BoE’s hold underscores lingering concerns about inflation. Where policy goes from here will depend on the delicate interplay between prices, jobs, and growth in the months ahead.
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