Fed Policy Divergence Looms as Markets Price in September Rate Cut

Markets now assign a 91% probability to a 25-basis-point Fed rate cut in September, according to CME Group data. This anticipated move WOULD widen the growing policy gap between the Federal Reserve and other major central banks.

The European Central Bank has already executed two rate cuts in 2025, with benchmark rates now 2% below US levels. Despite pausing in July due to trade policy uncertainties, the ECB maintains an accommodative stance after revising its 2026 inflation forecast down to 1.6%.

Bank of England Governor Andrew Bailey emphasized a "gradual downward path" for UK rates, though geopolitical risks temporarily halted their easing cycle. "The world is highly unpredictable," Bailey noted, underscoring the challenge of synchronized monetary policy in divergent economic conditions.