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From hawkish pauses to rate hikes and dovish tones, the world’s biggest central banks last week struck very different tones on monetary policy.



The European Central Bank on Thursday hiked rates and surprised markets with a worsening inflation outlook, which led investors to price in even more rate increases in the euro zone.



This followed a Federal Reserve meeting where the central bank decided to pause rate hikes. Just days before that, China’s central bank lowered its key medium-term lending rates to stimulate the economy. In Japan, where inflation is above target, the central bank has left its ultra-loose policy unchanged.



“Taking all these different approaches together shows that not only seems there to be a new divergence on the right approach for monetary policy but it also illustrates that the global economy is no longer synchronized but rather a collection of very different cycles,” Carsten Brzeski, global head of macro at ING Germany, told CNBC via email.



In Europe, inflation has come down in the bloc which uses the euro but remains well above the ECB target. This is also the case in the U.K., where the Bank of England is expected to raise rates Thursday after very strong labor data.



The Fed, which started its hiking cycle before the ECB, decided to take a break in June — but said there would be another two rate increases later this year, meaning its hiking cycle is not yet complete.



The picture is different in Asia, however. China’s economic recovery is stalling, with falls in both domestic and external demand leading policymakers to step up support measures in an effort to revive activity.



In Japan — which has battled a deflationary&nbsp;environment for many years — the central bank said it expects inflation to come down later this year and opted not to normalize policy yet.



“Each central bank [tries] to solve for its own economy, which obviously includes considerations for changes in financial conditions imposed from abroad,” Erik Nielsen, group chief economics advisor at UniCredit said via email.



<h2 class="wp-block-heading" id="h-market-impact"><a></a>Market impact</h2>



The euro rose to a 15-year high against the Japanese yen on Friday, according to Reuters, off the back of the divergent monetary policy decisions. The euro also broke above the $1.09 threshold as investors digested the ECB’s hawkish tone last Thursday.



In bond markets, the yield on the German 2-year bond hit a fresh 3-month higher Friday, given expectations that the ECB will continue with its approach in the short term.



“Makes sense we start seeing this divergence. In the past, it was clear there was a lot of room to cover for pretty much all the major central banks, while now, given the different stages the jurisdictions are in the cycle, there will be more nuanced decisions to be made,” Konstantin Veit, portfolio manager at PIMCO, told CNBC’s Street Signs Europe on Friday.



“This indeed will create opportunities for the investors.”



ECB President Christine Lagarde was asked during a press conference to compare her team’s decision to increase rates, versus the Federal Reserve’s decision to pause.



“We are not thinking about pausing,” she said. “Are we done? Have we finished the journey? No, we are not at [the] destination,” she said, pointing to at least another potential rate hike in July.



For some economists, it is only a matter of time before the ECB finds itself in a similar position to that of the Fed.



“The Fed is leading the ECB [as] the U.S. economy is leading the eurozone economy by a few quarters. This means that, at the latest after the September meeting, the ECB will also be confronted with the debate on whether or not to pause,” Brzeski said.

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WASHINGTON &#8212; &nbsp;The Federal Reserve on Wednesday decided against what would have been an 11th consecutive interest rate increase as it measures what the impacts have been from the previous 10.



But the decision by the Federal Open Market Committee to hold off on a hike at this two-day meeting came with a projection that another two quarter percentage point moves are on the way before the end of the year.



“We have raised our policy interest rate by five percentage points, and we’ve continued to reduce our security holdings at a brisk pace. We’ve covered a lot of ground and the full effects of our tightening have yet to be felt,” said Fed Chair Jerome Powell at a news conference following the central bank decision.



The possibility of further rate increases put pressure on stocks immediately after the news broke, but encouraging talk on the fight against inflation allowed the market to rebound briefly.



<h2 class="wp-block-heading" id="h-a-hawkish-pause"><a></a>A ‘hawkish pause’</h2>



The central bankers said they will take another six weeks to see the impacts of policy moves as the Fed fights an inflation battle that lately has shown some promising if uneven signs. The decision left the Fed’s key borrowing rate in a target range of 5%-5.25%. “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the post-meeting statement said. The Fed next meets July 25-26.



Markets had widely been anticipating the Fed to “skip” this meeting – officials generally prefer the term to a “pause,” which implies a longer-range plan to keep rates where they are. The expectation leaned heavily against an increase after policymakers, particularly Powell and Vice Chair Philip Jefferson, had indicated that some change in approach could be in order. The surprising aspect of the decision came with the “dot plot” in which the individual members of the FOMC indicate their expectations for rates further out. The dots moved decidedly upward, pushing the median expectation to a funds rate of 5.6% by the end of 2023. Assuming the committee moves in quarter-point increments, that would imply two more hikes over the remaining four meetings this year. Bank of America said in a note after the meeting that it expects the Fed to move in July and September.



During the press conference, Powell said the FOMC hadn’t yet made a decision about whether another increase would be likely in July.



“People expected a hawkish pause and they got a very hawkish pause,” said David Russell, vice president of market intelligence at TradeStation. “Given the strong labor market, the Fed has room to crush inflation and they don’t want to miss their chance.”



“Still, policymakers skipped hiking rates so they can monitor the data,” he continuned. “This increases the importance of each incremental economic report. More good news like this week’s CPI and PPI could let traders look past the Fed’s tough talk and see a dovish turn later in the year. Jerome Powell is still a barking dog, but he may be losing his bite.”



<h2 class="wp-block-heading"><a></a>Opinions vary on future hikes</h2>



FOMC members approved Wednesday’s move unanimously, though there remained considerable disagreement among members. Two members indicated they don’t see hikes this year while four saw one increase and nine, or half the committee, expect two. Two more members added a third hike while one saw four more, again assuming quarter-point moves. Members also moved up their forecasts for future years, now anticipating a fed funds rate of 4.6% in 2024 and 3.4% in 2025. That’s up from respective forecasts of 4.3% and 3.1% in March, when the Summary of Economic Projections was last updated. The future-year readings, though, do imply the Fed will start cutting rates – by a full percentage point in 2024, if this year’s outlook holds. The long-run expectation for the fed funds rate held at 2.5%. Those changes to the rate outlook occurred as members raised their expectations for economic growth for 2023, now anticipating a 1% gain in GDP as compared to the 0.4% estimate in March. Officials also were more optimistic about unemployment this year, now seeing a 4.1% rate by year’s end compared with 4.5% in March’s prediction. On inflation, they raised their collective projection to 3.9% for core (excluding food and energy) and lowered it slightly to 3.2% for headline. Those numbers had been 3.6% and 3.3% respectively for the personal consumption expenditures price index, the central bank’s preferred inflation gauge. The outlooks for subsequent years in GDP, unemployment and inflation were little changed. Fed officials believe that policy moves work with “long and variable lags,” meaning it takes time for rate hikes to work their way through the economy. The Fed began raising rates in March 2022, about a year after inflation started a dramatic climb to its highest level in some 41 years. Those rate hikes have amounted to 5 percentage points on the Fed’s benchmark to a level not seen since 2007. The increases have helped push 30-year mortgage rates over 7% and also spiked borrowing costs for other consumer items such as auto loans and credit cards. Recent data points such as the consumer and producer price indexes have shown the rate of inflation slowing, though consumers still face high costs for many items. The FOMC statement continued to note that “inflation remains elevated.“ Inflation hit the U.S. economy due to multiple Covid pandemic-related factors – clogged supply chains, unusually strong demand for high-priced goods over services, and trillions in stimulus from both Congress and the Fed that had an abundance of money chasing a dearth of goods. At the same, the supply-demand mismatches in the labor market had pushed both wages and prices higher, a situation the Fed has sought to correct through policy tightening that has included both rate increases and a reduction of more than half a trillion dollars from the assets it holds on its balance sheet.



—CNBC’s Sarah Min contributed to this report.

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The inflation rate cooled in May to its lowest annual rate in more than two years, likely taking pressure off the Federal Reserve to continue raising interest rates, the Labor Department reported Tuesday.



The consumer price index, which measures changes in a multitude of goods and services, increased just 0.1% for the month, bringing the annual level down to 4% from 4.9% in April. That 12-month increase was the smallest since March 2021, when inflation was just beginning to rise to what would become the highest in 41 years.



Excluding volatile food and energy prices, the picture wasn’t as optimistic.



So-called core inflation rose 0.4% on the month and was still up 5.3% from a year ago, indicating that while price pressures have eased somewhat, consumers are still under fire.



All of those numbers were exactly in line with the Dow Jones consensus estimates.



A 3.6% slide in energy prices helped keep the CPI gain in check for the month. Food prices rose just 0.2%.



However, a 0.6% increase in shelter prices was the biggest contributor to the increase for the all-items, or headline, CPI reading. Housing-related costs make up about one-third of the index’s weighting.



Elsewhere, used vehicle prices increased 4.4%, the same as in April, while transportation services were up 0.8%.



Markets showed little reaction to the release, despite its expected prominence in the decision the Federal Reserve will make at this week’s meeting regarding interest rates. Stock market futures were slightly positive, though Treasury yields fell sharply.



Pricing did shift notably in the fed funds market, with traders pricing in a 93% chance the Fed will not raise benchmark rates when its meeting concludes Wednesday.



“The encouraging trend in consumer prices will provide the Fed some leeway to keep rates unchanged this month and if the trend continues, the Fed will not likely hike for the rest of the year,” said Jeffrey Roach, chief economist at LPL Financial.



The tame CPI reading was good news for workers. Average hourly earnings adjusted for inflation rose 0.3% on the month, the Bureau of Labor Statistics said in a separate release. On an annual basis, real earnings are up 0.2% after running negative for much of the inflation surge that began about two years ago.



The consumer price index report featured a growing discrepancy between the core and headline numbers. The all-items index usually runs ahead of the ex-food and energy measure, but that hasn’t been the case lately.



The year-over-year discrepancy between the two measures stems from gas prices that were surging at this time in 2022. Ultimately, prices at the pump would exceed $5 a gallon, which had never happened before in the U.S. Gasoline prices have fallen 19.7% over the past year, Tuesday’s BLS report showed.



Food prices, however, were still up 6.7% from a year ago, though eggs fell 13.8% in May and are now slightly negative on a 12-month basis after surging in previous months. Shelter prices have risen 8% and transportation services are up 10.2%. Airline fares also have been in retreat, declining 13.4% year over year.

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