Fed Eases with Caution, BoJ Signals Rate Hike – Global Monetary Policy at a Crossroads

• Fed cut interest rates to 3.75–4.00% for the second time but signaled a more cautious stance going forward, with growing internal divisions and uncertainty due to the U.S. government shutdown
• Bank of Japan held rates at 0.5% but indicated a potential rate hike in December, driven by persistent inflation and rising wage pressures, despite political support for low rates
• Japanese yen weakened against the U.S. dollar following the BoJ decision, with USD/JPY moving higher as markets priced in divergent monetary policy paths

The Federal Reserve of the United States cut interest rates by 25 basis points for the second time in a row, bringing the target range down to 3.75–4.00%. The decision was a response to signs of slowing job growth and moderate economic expansion. Despite the move, Fed Chair Jerome Powell cooled market expectations for further easing, emphasizing the need for caution and a data-dependent approach.

The probability of another cut in December dropped from 90% to 60%. At the same time, the Fed announced it would end its quantitative tightening (QT) program on December 1, 2025, while continuing to reduce its holdings of mortgage-backed securities (MBS) at a pace of $35 billion per month.

Growing Divisions Within the Fed and Data Uncertainty

Divisions within the Federal Open Market Committee (FOMC) are becoming more pronounced—some members support further cuts, while others advocate a pause. Core inflation remains above target at 3% year-over-year, although Powell noted that the disinflationary trend is ongoing.

The situation is further complicated by the ongoing government shutdown, which is limiting access to key macroeconomic data. There’s a real risk that essential reports, such as the upcoming Non-Farm Payrolls (NFP), may not be released next week. Markets reacted nervously—Treasury yields and the dollar rose, while major stock indices declined.

Bank of Japan: December Rate Hike Increasingly Likely

In Japan, the central bank held its main interest rate at 0.5%, in line with market expectations. While the decision brought no change, the tone of the post-meeting communication suggested that a rate hike in December is becoming more likely. Two board members—Naoki Tamura and Hajime Takata—already voted in favor of an immediate move to 0.75%, indicating growing internal tensions.

Governor Kazuo Ueda said future decisions will depend heavily on wage data, particularly in light of the third consecutive year of union campaigns demanding 5% wage growth. Core inflation in Japan has remained above 2% for over three and a half years, and the GDP growth forecast has been raised to 0.7%. The yen weakened following the decision, potentially intensifying inflationary pressure through higher import costs.

Monetary Policy: Two Paths, One Challenge

Compared to the Fed, which is slowing the pace of easing and adopting a wait-and-see stance, and the BoJ, which is preparing for a potential policy shift. Global monetary policy is entering a new phase: increased uncertainty, diverging policy paths among these two central banks, and rising importance of domestic data all present challenges for markets and policymakers alike. December could prove decisive in setting the tone for 2026.

USDJPY reached 154.40, where it encountered resistance. The current situation on the currency pair, together with a possible divergence in monetary policy, creates opportunities for increased volatility, which is an ideal situation for traders looking for investment opportunities.