The U.S. Federal Reserve, Bank of Japan and European Central Bank will all announce key interest rate decisions this week, with each potentially nearing a pivotal moment in their monetary policy trajectory.

As Goldman Sachs strategist Michael Cahill put it in an email Sunday, “This should be a momentous week.”

“The Fed is expected to deliver what could be the last hike of a cycle that has been one for the books. The ECB will likely signal that it is coming close to the end of its own cycle out of negative rates, which is a big ‘mission accomplished’ in its own right,” Cahill, a G10 FX strategist, said.

“But as they are coming to a close, the BoJ could out-do them all by finally getting out of the starting blocks.”

The Fed

Each central bank faces a very different challenge. The Fed, which concludes its monetary policy meeting on Wednesday, last month paused its run of 10 consecutive interest rate hikes as it waited to see where inflation was headed.

The subsequent figures for June showed that consumer price inflation stateside fell to its lowest annual rate in more than two years, but the core CPI rate, which strips out volatile food and energy prices, was still up 4.8% year on year and 0.2% on the month.

Policymakers reiterated their commitment to bringing inflation down to the central bank’s 2% target, and the latest data flow has reinforced the impression that the U.S. economy is proving resilient.The market is all but certain that the Federal Open Market Committee will opt for a 25 basis point hike on Wednesday, taking the target fed funds rate to between 5.25% and 5.5%, according to the CME Group FedWatch tool.

Yet with inflation and the labor market now cooling consistently, Wednesday’s expected hike could mark the end of a 16-month run of almost constant monetary policy tightening.

“The Fed has communicated its willingness to raise rates again if necessary, but the July rate hike could be the last — as markets currently expect — if labor market and inflation data for July and August provide additional evidence that wage and inflationary pressures have now subsided to levels consistent with the Fed’s target,” economists at Moody’s Investors Service said in a research note last week.

“The FOMC will, however, maintain a tight monetary policy stance to aid continued softening in demand and consequently, inflation.”This was echoed by Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered, who said the debate going forward will be over the guidance that the Fed issues. Several analysts over the past week have suggested that policymakers will remain “data dependent,” but push back against any talk of interest rate cuts in the near future.

“There is a good case to be made that September should be a skip unless there is a significant upside inflation surprise, but the FOMC may be wary of giving even mildly dovish guidance,” Englander said.

“In our view the FOMC is like a weather forecaster who sees a 30% chance of rain, but skews the forecast to rain because the fallout from an incorrect sunny forecast is seen as greater than from an incorrect rain forecast.”

The ECB

Downside inflation surprises have also emerged in the euro zone of late, with June consumer price inflation across the bloc hitting 5.5%, its lowest point since January 2022. Yet core inflation remained stubbornly high at 5.4%, up slightly on the month, and both figures still vastly exceed the central bank’s 2% target.

The ECB raised its main interest rate by 25 basis points in June to 3.5%, diverging from the Fed’s pause and continuing a run of hikes that began in July 2022.

The market is pricing in a more than 99% chance of a further 25 basis point hike upon the conclusion of the ECB’s policy meeting on Thursday, according to Refinitiv data, and key central bank figures have mirrored trans-Atlantic peers in maintaining a hawkish tone.

ECB Chief Economist Philip Lane last month warned markets against pricing in cuts to interest rates within the next two years.

With a quarter-point hike all but predetermined, as with the Fed, the key focus of Thursday’s ECB announcement will be what the Governing Council indicates about the future path of policy rates, said BNP Paribas Chief European Economist Paul Hollingsworth.