Central Banks Under Pressure Amid Inflation and Trade Tensions

Central banks have become the focal point of global economic debates, both in Europe and the United States. Confronted with inflationary pressures and escalating trade tensions, their every move reverberates across international markets. The European Central Bank (ECB) has chosen caution, freezing its deposit rate at 2%—a decision positioned as a compromise between stability and uncertainty. Yet this pause raises doubts: is it a deliberate strategy or a risky gamble, especially as the Federal Reserve (FED) prepares to move in the opposite direction?

ECB Holds Steady at 2% Amid Weak Growth

The ECB confirmed its decision to keep the deposit rate unchanged at 2%, extending the pause it introduced in June. Inflation projections remain close to target, with forecasts of 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027. While price stability appears under control, economic growth tells another story: just 0.1% in the second quarter, down from 0.6% previously.

ECB President Christine Lagarde described the risks as “more balanced,” but acknowledged the volatility of the global trade environment. US tariffs of 15% on European exports have already strained key industries. While some sectors, such as pharmaceuticals, have benefited from regulatory clarity, others, particularly wine and spirits, face continuing uncertainty.

Lagarde also warned that further retaliation from Donald Trump could amplify economic challenges. Although trade-related risks have eased somewhat, they remain far from resolved. As a result, the ECB has adopted a “meeting by meeting” approach, avoiding firm forward guidance and signaling a cautious path through turbulent waters.

The FED’s Dilemma: Inflation vs. Employment

The US, meanwhile, confronts a different reality. Inflation rose to 2.9% in August, its highest level in seven months, yet the FED is preparing to cut rates on September 17. Market expectations place the probability of a 25-basis-point cut at over 90%.

The primary driver is a weakening labor market. Only 22,000 jobs were added in August compared with forecasts of 75,000, while unemployment claims surged to 263,000—a four-year high. At the Jackson Hole symposium, Jerome Powell admitted to facing a historic dilemma: inflationary risks remain elevated, while employment risks are mounting.

Analysts note a potential shift in priorities. Historically, the FED has focused on combating inflation, but Powell’s recent remarks suggest a tilt toward protecting the labor market. Such a pivot could reshape US monetary policy and test the central bank’s long-term credibility.

Market Reactions: Euro Strength, Dollar Weakness, Crypto Volatility

Diverging central bank strategies are reshaping global markets. The euro strengthened by 0.4% to $1.1735, while the US dollar index declined. Treasury yields briefly fell below 4%, reflecting expectations of easing monetary policy.

Cryptocurrencies also felt the impact. Bitcoin dipped 0.5% after the release of the US inflation report, falling from $114,300 to $113,700, before stabilizing. Analysts view the current phase as a delicate balance: moderate inflation could spark a crypto rally, while stronger inflation would likely push the dollar higher and drag bitcoin lower. Gold, meanwhile, gained slightly, reaffirming its status as a safe-haven asset.

Politics and Pressure on the FED

Across the Atlantic, the FED faces not only economic but also political headwinds. Donald Trump has intensified his criticism of Jerome Powell, accusing the central bank of acting too slowly, while targeting FED governor Lisa Cook in an escalating confrontation. Although legal safeguards prevent her dismissal, the political tension underscores the fragility of the US economic environment.

As the ECB and FED chart diverging courses, their decisions are shaping a global financial landscape caught between fragile stability and mounting speculation.