Economy

The outlook for the January CPI calls for a monthly increase of 0.3% for the all-items index and a 12-month inflation rate of 2.9%. Core readings are projected at 0.3% and 3.1%, respectively.
Things only get more complicated from here as President Donald Trump’s tariffs could act as an inflationary counterweight to an otherwise disinflationary trend.

Cartons of eggs are displayed at a grocery store with a warning that limits will be placed on purchases as bird flu continues to affect the egg industry on Feb. 10, 2025 in New York City.
Spencer Platt | Getty Images

The January consumer price index report is likely to tell a familiar story: another month, another expected miss for inflation as it relates to the Federal Reserve’s goal, with concerns aplenty about what happens from here.
So instead of looking for hope from the headline readings, which aren’t expected to change much from December, markets will pore through the details for trends that could shed some hope that the Fed eventually will be able to start lowering rates again.

“Inflation is stuck above target, with risks skewed to the upside, activity is strong, and the labor market appears to have stabilized around full employment,” Bank of America economist Stephen Juneau said in a note. “If our January CPI forecast is correct, the case for the Fed to stay on hold will strengthen further.”
Bank of America is one of the most pessimistic voices on Wall Street in terms of expecting further Fed easing.
In fact, the bank’s economists believe the Fed will stay on hold for the rest of the year — and beyond — as inflation holds higher, the labor market remains strong and the economy generally stays out of the kind of trouble that would necessitate rate cuts. Traders otherwise figure the Fed to approve a quarter percentage point reduction in July and then stay put, according to CME Group data.
More immediately, Bank of America’s forecast pretty much meshes with the Dow Jones outlook for January CPI: a monthly increase of 0.3% for the all-items index and a 12-month inflation rate of 2.9%, the latter the same as December. Excluding food and energy, the respective core readings are projected at 0.3% and 3.1%, the annual mark just a notch down from the 3.2% reading in December.
From a details standpoint, increases are likely to be driven by rises in car prices and auto insurance as well as communications, according to Goldman Sachs. The firm expects only moderate downward pressure from airfares and, importantly, the rent-related categories that make up about one-third of the CPI weighting and have been largely responsible for inflation holding above the Fed’s 2% goal.

Things only get more complicated from here.

Optimism despite tariff concerns

While economists expect a good share of disinflation from some key categories, President Donald Trump’s tariffs could act as an inflationary counterweight.
“Going forward, we see further disinflation in the pipeline over the next year from rebalancing in the auto, housing rental, and labor markets, but an offset from an escalation in tariff policy,” Goldman economists said in a note.
There’s been some good news lately, though. While the University of Michigan’s consumer survey showed a surprising bump in inflation expectations, other measures indicate the outlook is actually softening.
The National Federation of Independent Business survey for January showed that just 18% of the small business gauge reported inflation as being their biggest issue, the lowest level since November 2021. Also, the Cleveland Fed’s first-quarter Survey of Firms’ Inflation Expectations showed that CEOs and other top executives see CPI to run at a 3.2% rate over the next 12 months. While that’s well above the 2% standard, it is a sharp drop from the 3.8% in the fourth quarter.
Amid the conflicting information, the Fed is expected to stay put.
Fed Chair Jerome Powell on Tuesday said the central bank is in no rush to cut rates further, while Cleveland Fed President Beth Hammack noted the persistence of inflation that could be exacerbated by tariffs as reason to stay put.
“While monetary policy needs to be forward-looking in nature, forecasts are no substitute for realizations. Or as they might have put it in Jerry Maguire, ‘show me the low inflation,'” Hammack said. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldJay Powell has defended the Federal Reserve’s authority over US monetary policy, as he vowed to “focus on the data” and avoid wading into politics despite calls from the White House and some lawmakers to cut borrowing costs.The Fed is facing the fiercest challenge to its independence to set interest rates since the 1980s, with Donald Trump claiming during his first week back in the White House that he understood monetary policy better than the central bank. Trump has also said borrowing costs should be lower. Fed chair Powell told lawmakers on the Senate’s banking committee on Tuesday that the central bank stood a better chance of keeping prices under control if it remained above the fray — and was in turn left to get on with its job of setting interest rates free from political interference. “We’ll make better policy, we’ll keep inflation lower, if we just focus on doing our job and stay out of politics, stay out of elections and don’t try to favour or hurt any political party, or any political filter and just try to focus on the data,” Powell said in his first appearance before the influential committee since Trump returned to the presidency. “If we start putting up political filters, we’ll be less effective at our already quite difficult job.” Powell was adamant that any decision by Trump to sack one of the seven members of the Fed’s board of governors was “pretty clearly not allowed under the law”. The remarks come as some Democrats are concerned that the Fed is already responding to Republican pressure. Democratic senators at the hearing cited the Fed’s plans to revisit rules on so-called stress tests for the country’s biggest banks, the departure of its chief supervisor Michael Barr from that role and its decision to quit the Network for the Greening of the Financial System as evidence that it was succumbing to Republican attacks. However, Powell made clear on Tuesday that when it came to monetary policy, the Fed would not respond to pressure from the new administration and lawmakers on both sides of the aisle to cut interest rates fast. Show video infoThe Fed chair reiterated that strong growth meant rate-setters were “not in a hurry” to reduce borrowing costs lower than their current level of between 4.25 per cent and 4.5 per cent. In a hearing dominated by Democrats’ concerns over the Trump administration’s gutting of the Consumer Financial Protection Bureau and Republican claims that many right-leaning Americans are being debanked owing to their political leanings, Powell refused to be drawn on what the economic consequences of the president’s actions might be. “It really does remain to be seen what tariff policies would be implemented. It would be unwise to speculate when we really don’t know. We see proposals, but it’s so hard to say what will happen,” said Powell. “It’s really not just tariffs. It’s tariffs, immigration, fiscal policy and regulatory policy. We’ll try to make sense of it and do what’s right for monetary policy.” John Williams, president of the New York Fed, also on Tuesday signalled rate-setters would need to wait and see how economic conditions evolved before deciding whether to cut rates. While borrowing costs were still “modestly restrictive”, Williams said the outlook was “highly uncertain, particularly around potential fiscal, trade, immigration and regulatory policies”. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.It is disgusting to read the boast of the world’s richest man that “we spent the weekend feeding USAID into the wood chipper”. That this raises constitutional and legal issues for the US republic is quite clear. Indeed, it is evident that those now in charge would be quite happy to dispose of such tiresome constraints altogether. But there are also moral issues. Should the US effort to succour the world’s poorest have been fed into a “woodchipper” at all? The answer is “no”.As Paul Krugman notes in an exceptional recent piece on his Substack, the US made a huge effort after the second world war to be a new and different sort of great power: it sought to create allies, not tributaries; economic development, not predation; global institutions, not imperial rule; and international law, not the old idea of “might makes right”. There was, inevitably, much backsliding. But in all, the US has indeed been a strikingly benign and successful hegemon.The explosive growth of world trade, the rise of once-impoverished China and India, the peaceful fall of the Soviet Union and, not least, the decline in the proportion of human beings living in extreme poverty — from 59 per cent in 1950 to 8.5 per cent in 2024, despite a tripling of the world population — are proof of its success. The US should be hugely proud of its achievements as world leader, and not seek to imitate the bullying of Vladimir Putin’s Russia, instead. (See charts.)The US Agency for International Development, then, is part of something far bigger. The US also played a decisive role in the creation of the World Bank, the IMF, the UN, the General Agreement on Tariffs and Trade, the International Development Association and Nato — unambiguously, both then and now, a defensive alliance.The underlying idea was that the world would be a better place if we recognised our shared interest in peaceful co-operation. Why would anyone wish to sacrifice this ideal for a return to the 19th-century competition among imperialist great powers that culminated in two world wars, Stalinism and fascism? Do pathogens or the climate recognise international borders? Is war among nuclear powers even thinkable? Can any country truly be an island? Can humanity, having trashed this planet, really find rescue on the barren planet of Mars?The onslaught on USAID is a token of the madness now overwhelming the US. But it is revealing. Its budget was 0.7 per cent of federal spending and 0.15 per cent of GDP in the 2023 fiscal year. Its destruction is above all symbolic. According to Musk, USAID is a “viper’s nest of radical-left marxists who hate America”. USAID spends on things like Aids relief and family planning in the world’s poorest countries. So, what radical-left Marxist launched the President’s Emergency Plan for Aids Relief? George W Bush, that’s who. Even if this onslaught proves just an interruption, it will do much damage.Unfortunately, this comes at a bad time for economic development. As the World Bank’s latest Global Economic Prospects notes, not only is global economic growth slowing, but the performance of low-income developing countries has become particularly worrying.“Catch-up toward advanced economy income levels has steadily weakened across [emerging market and developing economies] over the first quarter of the 21st century,” the report argues. This is the result of successive shocks, slowing reforms and a more adverse external environment, characterised in large part by “heightened policy uncertainty and adverse trade policy shifts”.“Rapid growth underpinned by domestic reforms and a benign global environment allowed many low-income countries . . . to attain middle-income rank in the first decade of this century. Since then, the rate at which low-income countries are graduating to middle-income status has slowed markedly.” Growth in real incomes per head in these countries has simply become anaemic. That is partly because of internal conflict and partly because of adverse external developments, including the global financial crisis, the pandemic, unexpected jumps in prices of essential commodities and higher interest rates.As a result, argues the report, across a wide array of development metrics, today’s low-income countries are behind where the ones that subsequently became middle-income were in 2000. They are also now more susceptible to shocks related to climate change.In considering the plight of the poorest countries it is necessary to understand the constraints upon them. They lack the resources to provide healthcare or needed education. Thus, according to the World Bank, spending on health per person in high-income countries is more than 50 times as big as it is in low-income ones, in real terms, and spending on education is more than 150 times as big. Moreover, the cost of interest on debt has climbed to more than 10 per cent of government revenues in low-income countries, partly because of the need to borrow in crises and partly because of the elevated interest rates.A world with more prosperous, healthier and more stable countries is a better one to live in, not just morally, but practically. The main instruments for achieving these ends remain multilateral institutions. If the US is going to turn away from its past wisdom, it is up to the rest of us to create a multilateral way forward, while hoping that the US will at last find a way back into the light.Minouche Shafik has argued persuasively for some serious rethinking. There are indeed many global challenges ahead, as she notes. But there is one glorious opportunity. Eliminating the scourge of extreme poverty from our planet is now tantalisingly near. But we are failing. We must try harder. This long-sought goal is far too close to be abandoned.martin.wolf@ft.comFollow Martin Wolf with myFT and on X More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Bank of England’s decision to cut interest rates by 25 basis points last week was widely anticipated, but it still stunned some economists. That’s because Catherine Mann, the Monetary Policy Committee’s arch-hawk, suddenly switched from calling for the cost of credit to stay where it is, to voting for a jumbo half-point cut. Her argument, outlined in an interview in the Financial Times on Tuesday, was that Britain’s economic outlook had weakened substantively, putting rate-setters on the back foot. As things stand, she is not wrong.At 4.5 per cent, the bank rate is well above most estimates of the so-called neutral rate, the point at which monetary policy is neither expansionary nor contractionary. Inflation is close to target, at 2.5 per cent, and with the UK economy treading water, weak demand should keep a lid on further price pressures.On Thursday, data from the Office for National Statistics is expected to show that the UK economy barely grew in the second half of 2024. Business and consumer confidence has wilted since the Labour party took charge last summer. The chancellor Rachel Reeves’ decision to raise employers’ national insurance contributions in the Autumn Budget has pushed up companies’ costs and triggered a slowdown in hiring. A survey on Monday showed UK recruiters were reporting the toughest conditions in the jobs market since the Covid-19 pandemic. Weak economic activity tends to make it harder for businesses to pass on higher costs to consumers, restraining inflation.This all suggests current interest rates are too restrictive. Financial markets are pricing in around three further 25bp cuts before the end of the year. But, given sluggish economic activity, the BoE may need to go further, faster. Indeed, with most UK mortgages agreed at a fixed rate, it will take time for any rate cuts to improve consumers’ cash flow.There are reasons for caution, though. First, the BoE’s latest inflation forecasts showed price growth actually rising in the near term. A number of price shocks, including from higher energy prices and the NICs increase — which will take effect in April — are expected to push UK inflation up to 3.7 per cent later this year. Though central banks often look through temporary bumps in prices, there is a risk that this one becomes entrenched particularly as inflation has been above target for so long. Businesses could react to a range of higher costs by pushing up retail prices. If so, Britain could face a nasty dose of stagflation.Second, economic uncertainty is high. It is unclear what impact trade wars might have on the UK economy. The ONS’ labour market data is also currently unreliable, due to falling response rates to its surveys. Together, these factors make it harder for the BoE to judge how much of the economic slowdown is driven by falling demand or supply. This strengthens the case for proceeding with gradual rate cuts, in quarter-point steps, and then accelerating cuts should this year’s inflation rise indeed prove to be temporary. Central banking is about balancing risks, and though the case for cutting rates faster now is strong, gradualism gives the BoE more flexibility when economic clarity is particularly lacking. Mann’s diagnosis is right, but her choice of medicine, a chunky 50bp cut, would not be prudent at this point.More importantly, though lower rates would prop up Britain’s sagging economy — and reduce government borrowing costs — it would only soften the symptoms of a deeper malaise. The onus remains on Labour, not the BoE, to reignite animal spirits and outline a fiscally credible path to higher long-term growth. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.“Trump trade” bets on a stronger dollar and higher bond yields have backfired this year as investors take a more bearish view on the economic fallout from the new US administration’s global trade war.The US currency has slipped and Treasuries have rallied since early January, confounding widespread investor expectations that President Donald Trump’s plans for trade tariffs and tax cuts would keep inflation and interest rates high.“Despite what it feels like, if you really zoom out to the beginning of this year, a lot of the [Trump] trades haven’t worked,” said Jerry Minier, co-head of G10 forex trading at Barclays. “That is causing people to reassess.”Investors have pulled back from popular Trump trades partly because the president’s tariffs have been less aggressive than many feared. But many also worry that the uncertainty sparked by the stop-start trade war could begin to hurt confidence in the US economy, undermining the bullish market reaction to Trump’s election in November.The “average menu” of popular trades, such as betting against the euro or the Chinese renminbi, has not rewarded investors this year, Minier said. “You continue to need reasons for the dollar [rally] to continue to extend — at least for now those things have been pulled away,” he added.Bets that Trump’s inflationary policies would both give the Federal Reserve less room to cut interest rates and depress growth in US trading partners, helped drive a huge rally in the dollar. The US currency gained 8 per cent against a basket of its peers from late September until the end of the year. Asset managers flipped to a net long dollar position in December for the first time since 2017, according to an analysis by CME Group of currency futures contracts. But this year the US currency has slipped 0.4 per cent.Expectations of higher inflation also helped push 10-year Treasury yields, which move inversely to prices, to 4.8 per cent in January, their highest since late 2023. But they have now fallen back to 4.54 per cent, as the market’s focus has switched from inflation to fears that the US’s buoyant economy could falter under the new president.“There’s an underlying fear that growth might be slowing down,” said Torsten Slok, chief economist at investment firm Apollo, with a trade war “potentially having some growth implications”.The bond market is “caught between a fear that inflation might be a little bit higher because of a trade war, and a fear that US growth or global growth might be slower”, said David Kelly, chief global strategist at JPMorgan Asset Management.This month Trump backed down at the eleventh hour on threats to impose sweeping tariffs on Mexico and Canada, granting both countries a 30-day delay. But he pushed ahead with 10 per cent additional import tariffs on China, and late on Friday the president said he could also hit Japan with new levies, to tackle the trade deficit with the US’s most important ally in the Indo-Pacific. He has also announced plans for 25 per cent tariffs on steel and aluminium imports.Emerging markets, widely expected to be a particular victim of the trade war and a stronger dollar, have also defied expectations in recent weeks, after a grim 2024 in which some currencies touched multiyear lows.Since the start of Trump’s second term last month, the Chilean peso has gained more than 3 per cent, while the Colombian peso and the Brazilian real are up more than 6 per cent against the greenback. Bank of America strategists have turned positive on emerging markets in the belief that bets on a higher dollar, which is at its strongest in real effective exchange rate terms since 1985, are overstretched.“It is about very extreme positioning, and a lot of tariff noise already being priced in,” said David Hauner, the bank’s head of global emerging markets fixed-income strategy. “It’s not like it couldn’t get worse — of course, it could — but for the time being, given the back and forth of the last few weeks, we have priced in a fair amount.”Investors say emerging market central banks have scope to cut borrowing costs to support economic growth, after aggressive rate rises in recent years to tackle inflation. Mexico, the Czech Republic and India all reduced rates last week.Real interest rates — which are adjusted for inflation — are also higher in much of the developing world than in the US, making it profitable to borrow in dollars and invest in emerging markets.“No matter how you slice or dice it, local currencies have become very, very cheap — even if the dollar doesn’t weaken from here, and it just stabilises,” said one emerging markets fund manager, who had just returned from Brazil looking for cheaply priced assets. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Britain on Tuesday refused to join the EU in threatening a trade fight with the US over steel tariffs and followed Washington in declining to sign a global accord on artificial intelligence, in a sign of Sir Keir Starmer setting a new foreign policy in the era of President Donald Trump.Lord Peter Mandelson, Britain’s new ambassador to the US, told the Financial Times that Britain had to embrace “any opportunities opening up as a result of Brexit” and earn a living in the world by being “not Europe”.An early sign of that approach came as trade minister Douglas Alexander told MPs that the UK would not join the EU in immediately threatening tariff reprisals against the US, after Trump announced a 25 per cent tax on all steel and aluminium imports.Alexander said the steel tariffs were not due to take effect until March 12 and that Britain would use the time to talk to the Trump administration and assess its options. “Of course, we want to avoid a significant escalation,” he said. “This is an opportunity for the UK to exercise both a cool head and clear-eyed sense of where the national interest lies.”Downing Street has not ruled out retaliatory tariffs, but ministers privately admit that such a move would have little impact on the US and risk putting Britain in line for further Trump tariffs.Alexander said British steel exports to the US were worth about £400mn and that tariffs would be a “significant blow”, but Downing Street has noted that they amounted only to about 5 per cent of UK steel exports.Although Number 10 has left retaliatory tariffs on the table, there has been none of the talk seen in Brussels of “firm and proportionate countermeasures”.Mandelson, who began work in Washington this week, said he remained convinced that Brexit “inflicted the greatest damage on the country of anything in my lifetime” but that he accepted it would not be reversed.The Labour peer said one of his “signature” objectives as ambassador would be to build closer ties between the UK and the US on AI and technology, warning that the EU had become too rules-bound.Sir Iain Duncan Smith, former Conservative leader, said: “These Brexit freedoms could not have come at a better time. We have an opportunity to set our policy for the US and Peter Mandelson’s job is to remind people in Washington that we are out with the EU.”“It’s funny that it’s a Labour government that has discovered the benefits of Brexit,” remarked one veteran diplomat.However, Britain’s attempts to “reset” relations with the EU could be harmed if Brussels perceives Starmer, the prime minister, to be getting too close to Washington and undercutting the European economic model.On Tuesday, Britain joined the US in refusing to sign a global AI agreement in Paris; the statement was signed by France, China and India among other countries.Downing Street said France remained a close partner in areas such as AI, but that the UK “hadn’t been able to agree all parts of the leaders’ declaration” and would “only ever sign up to initiatives that are in UK national interests”.The statement pledged an “open”, “inclusive” and “ethical” approach to AI development, but US vice-president JD Vance warned delegates in Paris that too much regulation could “kill a transformative industry just as it’s taking off”.One senior UK government official said Britain had opted not to sign the communique because its language was not sufficiently focused on national security and leaned more towards focusing on safety and ethics.“We have taken a slightly different approach to the EU . . . the character of the way we’re dealing with AI is quite different,” the person added, noting that the strategy had “opened the door diplomatically” in terms of Britain’s dealings with the US.The UK government has sought to position its AI Safety Institute as an organisation focused on national security, with direct links to intelligence agency GCHQ. Senior figures around Trump, including Elon Musk, had been highly critical of the focus by Joe Biden’s administration on “woke” concerns around AI safety, including bias and misinformation, but are deeply involved in efforts to ensure the novel technology furthers the west’s national security interests. More

Ursula von der Leyen (CDU, r), President of the European Commission, stands in the plenary chamber of the European Parliament.
Philipp von Ditfurth | Picture Alliance | Getty Images

The European Union plans to retaliate against the United States for new steel and aluminum tariffs, adding another element to rising global trade tensions.
“Unjustified tariffs on the EU will not go unanswered — they will trigger firm and proportionate countermeasures,” European Commission President Ursula von der Leyen said in a statement late Monday.

The statement comes after U.S. President Donald Trump signed an executive order to impose 25% tariffs on steel and aluminum. Shares of American steelmakers rallied sharply on Monday following the order.
Tariffs are effectively a tax paid to import a good into a country. The latest tariffs could raise the price of foreign steel, and thereby help to support U.S. steel producers at the expense of international competitors. Von der Leyen called tariffs “bad for business, worse for consumers.”
Trump has taken an aggressive approach with tariffs early in his second tenure in the White House. He has already ordered tariffs on China, Canada and Mexico. The Canada and Mexico tariffs have since been delayed one month.
Europe is not alone in pushing back against the U.S. tariffs. Last week, China announced new levies against select U.S. imports.
Reuters has reported that von der Leyen is scheduled to meet U.S. Vice President JD Vance on Tuesday.
The rising trade tensions come at a time when inflation, both in the U.S. and globally, has yet to completely return to pre-pandemic levels. Some economists warn that tariffs could be passed on to consumers in the form of higher prices, which would push up inflation.

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This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersIn frequently declaring their monetary policy setting to be “restrictive”, European Central Bank president Christine Lagarde and Bank of England governor Andrew Bailey have raised the immediate follow-up question: what is the neutral level of interest rates, neither constraining nor stimulating economic activity? Luckily for us, both central banks published their latest assessments of natural/neutral rates late last week, allowing me to compare and contrast. One thing to note is that I am making no distinction between natural and neutral rates here. The ECB likes the word “natural”, while the BoE prefers “neutral”. They are talking about the same concept.There are many similarities in their assessments and, for additional spice, they both managed to insert a glaring contradiction for our delight. Where is the neutral rate? Both the ECB and BoE stressed that the neutral rate is highly uncertain and can only be described as a range, which might change.In nominal terms, Lagarde said in Davos that the range of neutrality lay between 1.75 per cent and 2.25 per cent. Not surprisingly, this is also the range outlined in the ECB’s formal assessment.The BoE’s assessment was more cautious, harking back to previous work from 2018, which highlighted a range of 2 to 3 per cent with a modal estimate of 2.25 per cent. It now thinks the range is a bit higher, but is very uncertain about how much. Deputy governor Claire Lombardelli said: “You know, you can add all that up and say perhaps we’re in the region of 2 to 4 [per cent]. It’s very broad.”The benefit of both these assessments is that current interest rates are above these levels, so officials can say they are restrictive without further qualification. Do officials use these estimates?Yes and no. The neutral rate number sits in the background within many macroeconomic models providing a gravitational force, gently pulling forecasts towards this equilibrium in time. They also help officials think about the degree of stimulus or restrictiveness in the stance of the central banks’ policy. But both banks stressed that on a day-to-day basis, the estimates of neutrality do not loom large. The ECB said its estimates should not be taken very seriously. “These cannot be seen as a mechanical gauge of appropriate monetary policy at any point in time,” it said, and highlighted (again) that the bank takes decisions based on the inflation outlook, the dynamics of underlying inflation and its assessment of the effect of monetary policy on the economy. The BoE said its assessment of the neutral rate “plays a role” in policy setting, but this comes alongside many other considerations including financial conditions, trends in household savings, surveys of market participants and assessments of the economic cycle. Bailey said: “There is a high degree of uncertainty around this and, as we say, that’s why we don’t use it for setting interest rates.”Why is the neutral rate so darn uncertain?Because the neutral rate is a theoretical concept, it cannot be measured and can only be estimated within economic models. Different models will produce different results. Each will produce a range of plausible answers and the latest estimates, which, while most useful for policymaking, are also the least certain and most prone to revision.The ECB did a rather better job than the BoE in highlighting the uncertainties. It published estimates with confidence bounds and, unlike the BoE, did not publish guesswork about the reasons for potential recent movements in neutral rates. The chart below shows various estimates of the Eurozone’s neutral rate. To keep everything nominal, I have added 2 percentage points to each number in the chart, so it is slightly different from the original. It shows a wide range and you can see Lagarde’s 1.75 to 2.25 per cent estimates in the blue and yellow shading along with the ECB’s current interest rate at 2.75 per cent.Some content could not load. Check your internet connection or browser settings.The ECB’s concern about a wide potential range of neutral rate estimates is shown in the second chart, which focuses on the Holsten, Laubach and Williams model collated by the New York Fed. Apart from the scale of revisions, early estimates are often far from later estimates for the same period, showing the difficulty of using this data in real time. Some content could not load. Check your internet connection or browser settings.The glaring contradictionsMany of you will already have noticed the glaring contradiction in the ECB work because it is on show in the charts. Lagarde said the neutral range was 1.75 per cent to 2.25 per cent, but that is true only if you ignore the HLW measure which, the ECB itself noted, had a nominal range between 1.75 per cent and 3 per cent. Including all the measures, it is no longer clear that ECB policy is restrictive in comparison with estimates of neutral.The ECB sought to explain this inconsistency by saying the 1.75 per cent to 2.25 per cent range included all measures “for which an update to the end of 2024 is available”. You have to wonder whether this form of words was used because the president had declared the neutral range in a TV interview in January.The glaring contradiction from the BoE is that both officials and Bailey stated confidently that the neutral rate was a “global concept” not a domestic UK measure. The problem was that the 2 to 3 per cent range from the 2018 analysis was specific to the UK and much of the wider BoE analysis, such as wondering if there will be a higher neutral rate due to looser fiscal policy in future, does not match current UK fiscal plans. It is lucky that European central banks do not put a lot of policy weight on these estimates of neutral. The numbers are uncertain and the analysis does not stand up well under scrutiny. In his interview with the FT last week, the Finnish central bank governor Olli Rehn put it well when he said the following:We should not constrain our freedom of action because of a theoretical concept, which is nice to talk about when you have a pint in the pub, but it’s not suitable as a concrete benchmark for monetary policy . . .I’m actually fascinated by the discussion and always have been. But the more one studies it, the more one realises the uncertainties Bessent’s brave betFresh from the humiliation of suggesting the Donald Trump administration would move gradually with tariffs only to be blown away by the president’s announcement of huge levies on Mexico and Canada, Treasury secretary Scott Bessent has made another public bet. Speaking about Trump, Bessent said that “he and I are focused on the 10-year Treasury”, when talking to Fox Business last week. “He is not calling for the Fed to lower rates.”That’s quite a bet, since Trump has regularly called for the Fed to cut rates. Bessent doubled down later in the week when talking to Bloomberg. “We are not focused on whether the Fed is going to cut [or] not cut, we are focused on lowering rates, so we are less focused on the specific of rate cuts and [instead] how do we get the whole curve down.”His confidence is brave. And I say that using the British civil service meaning of the word — foolhardy. What I’ve been reading and watchingI wrote about why US and European monetary policy was likely to divergeAhead of Jay Powell’s testimony to Congress this week, members of the Federal Open Market Committee have been downplaying the chances of rate cuts in the near future. You can read speeches from Lorie Logan, Austan Goolsbee and Adriana Kugler here, or see an updated summary of central bank views on the FT’s Monetary Policy RadarCatherine Mann became the most interesting member of the BoE’s Monetary Policy Committee by shifting from being the most hawkish to seeking an immediate half-point cut last week. The FT interviewed her after the decision and asked why she changed her mind. Full transcript on Monetary Policy Radar A chart that mattersThe BoE generated huge amounts of alarmist media coverage last week about it “halving” its growth forecast for 2025. Actually, as the chart below shows, the forecast for 2025 was barely changed from November and subsequent growth was revised higher. What had changed was that the BoE had recognised there had been no growth in the final two quarters of 2024. I was surprised by how difficult it was to gather the data in the chart below. (You have to download two different spreadsheets from separate obscure zip files, ask the BoE to remove password protection on one of them and then merge the data). Given the horrible headlines the next day, perhaps it is time to retire headline forecasts based on annual average GDP levels. In these figures, the previous year is just as important as the year of the “forecast”, so people always misunderstand the results. The BoE (and the ECB) could learn from the Fed, which publishes Q4 2025 over Q4 2024 forecasts and will always avoid this type of misunderstanding. Some content could not load. Check your internet connection or browser settings.Recommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More