On June 18, the Federal Open Market Committee (FOMC) meeting of the U.S. central bank, the Federal Reserve (Fed), was held. As it was the debut of the new Fed Chair, Kevin Warsh, and given the backdrop of rising inflationary pressure, the meeting drew intense interest from global investors. Because Chair Kevin Warsh carries an image of being pro-Trump, some had expected that, despite recent price pressures, a shift toward tighter monetary policy would not come easily, but the outcome was quite different.

Although the Fed kept the policy rate unchanged, the dot plot projecting the future path of the policy rate placed more weight on one or two hikes within the year. In addition, by deleting the term “easing cycle” from the Statement, it signaled that it could step away from a rate-cutting cycle.

An ‘easing cycle’ refers not to a one-off rate cut but to a series of reductions in the policy rate over a period of time. Deleting this word this time can be taken to mean that moving out of the rate-cutting cycle and shifting toward a hold or even hikes is now possible.

As the reason, they cited inflationary pressure that appears unlikely to subside easily even though the likelihood of a ceasefire has risen. The expectations of global investors, which at the start of the year leaned toward two to three additional U.S. rate cuts, appear to have shifted instead toward hikes within the year due to the change in the stance of the Fed shown at this FOMC.

This shift in stance is not limited to the U.S. Fed. In the second week of June, the European Central Bank (ECB) raised its policy rate from 2.0% to 2.25%, turning to a tightening posture for the first time since September 2023. ECB President Christine Lagarde pointed to the continued inflationary pressures stemming from factors such as the war in the Middle East, even though growth in the eurozone remains far from robust, as the backdrop for the hike.

Lagarde assessed that, even with talk of a possible end to the conflict, the earlier run-up in energy prices has been strengthening the tendency of firms such as manufacturers to pass higher costs on to consumer prices. Accordingly, she stressed that this move is less an ‘insurance hike’ to preempt a short-term price surge and more a policy gambit to respond to broadly rising inflationary pressure. In this respect, the ECB also appears to be entering a rate-hike cycle.

Around the same time, the Bank of Japan also raised its policy rate by 0.25 percentage point to 1.0%. This is the highest level since 1995, just after the collapse of the bubble economy. The Bank of Japan had taken a very cautious stance on raising rates due to shocks such as the unwinding of yen carry trades in August 2024, but it proceeded with the hike to respond to markedly stronger inflationary pressure and a severe yen weakness that has not stabilized easily. Governor Kazuo Ueda noted that yen weakness can fuel price pressures and indicated an intention to keep raising rates in line with the inflation trend.

Beyond the Bank of Japan, the Reserve Bank of Australia (RBA) has already carried out two rate hikes this year, and the Norwegian central bank has also joined with preemptive increases. Indonesia also raised rates to stabilize its currency, and Canada, the United Kingdom, and India signaled that they could hike if needed. The Bank of Korea is maintaining a similar posture. Bank of Korea Governor Shin Hyun-song notes that the recent persistently high exchange rate, coupled with elevated oil prices linked to the war in the Middle East, is significantly intensifying inflation pressures. With first-quarter growth solid and a record-setting expansion driven by exports, he suggested that a shift toward rate hikes in the second half may be necessary.

As inflation stabilized after the Russia-Ukraine war, the global rate-cutting cycle that had been undertaken to support growth is drawing to a close and is expected to give way to rate hikes. Interest rates are a key factor that affects the real economy across the board. With financial conditions changing, the responses of each economic actor will also likely need to change.