Global central banks are closely monitoring the Fed's rate outlook and its impact on markets.

• On Wednesday, the U.S. Federal Reserve caused market turmoil by updating its inflation forecast and indicating that it might not implement as many interest rate reductions in the upcoming year.
• The uncertainty of global policy easing is increasing due to a stronger U.S. dollar, higher interest rates, and the possibility of inflationary tariffs from President-elect Donald Trump.
• Independent monetary policy decisions by global central banks may be influenced by currency movements, which could necessitate coordinated action.

On Wednesday, the U.S. Federal Reserve caused market turmoil by adjusting its inflation forecast and indicating that it would implement fewer interest rate reductions in the upcoming year. As a result, investors are now frantically trying to evaluate the potential impact of these changes on global interest rates in the future.

Jerome Powell, the Fed Chair, stated that inflation has been stationary this year and indicated that the bank may reduce rates by half in 2025, which is two times less than what was predicted in September.

The uncertainty of policy easing worldwide is increasing due to the possibility of higher interest rates and inflationary tariffs from President-elect Donald Trump, despite global central banks' insistence on independence in their monetary policy decisions.

A stronger U.S. dollar and tighter global financial conditions will result from a more hawkish Fed, according to Qian Wang, chief Asia-Pacific economist at Vanguard.

In many emerging markets, central banks are moving towards easing, but with the Fed staying higher for longer, there will be less room for easing.

In 2025, global central banks may face challenges in setting their monetary policies.

Asia

The cautious stance of the Fed on future rate cuts caused Asian currencies to plummet on Thursday. The Japanese yen dropped 0.74% to 155.94 against the dollar, reaching a one-month low. The South Korean won hovered near its weakest level since March 2009, while the Indian rupee fell to a record low, tumbling below the 85 mark against the U.S. dollar.

The Bank of Japan

The Bank of Japan decided to keep its benchmark interest rate at 0.25% and opted to evaluate the effects of financial and foreign exchange markets on Japan's economic activity and prices. The BOJ's statement revealed that the decision to hold was made by a 8-1 vote, with board member Naoki Tamura advocating for a 25-basis-point increase.

Shigeto Nagai, head of Japan Economics at Oxford Economics, believes that the Fed's more cautious stance on rate cuts in 2025 will increase the likelihood of a stronger dollar.

If the U.S. dollar strengthens further, the weak yen may return as a major driver of the BOJ's rate decision in 2025, according to him.

"The BOJ will face a risk in 2025 due to a weaker yen, as it will negatively impact wage-driven inflation dynamics by reducing real income."

The People's Bank of China

This month, China's top leadership surprised the market by signaling a shift in its monetary policy stance after 14 years. The world's second-largest economy is looking to switch its policy stance next year from "prudent" to "moderately loose," a phrase it hasn't used since the depths of the global financial crisis in 2008.

The Fed's revised outlook on future rate cuts may not significantly impact China's central bank's policy easing trajectory, but it could potentially affect the Chinese yuan's value.

Abrdn's Edmund Goh stated that the PBOC should prioritize fighting deflation, and he believes that the domestic interest rate policy will not be significantly impacted by the Fed's interest rate decision, both in the short and long term.

"If the RMB is allowed to slide slowly against other currencies, they will likely let it happen despite concerns about its weakness."

The PBOC may prioritize domestic factors if the Fed cuts more aggressively, according to Hao Zhou, chief economist at Guotai Junan International. This could lead to the yuan being under pressure to depreciate.

Reserve Bank of India

The RBI maintained its repo rate of 6.50% at its latest policy meeting this month.

The Indian economy is experiencing a slower growth rate than anticipated by economists, and analysts predict a 25-basis-points interest rate cut at the next policy meeting in February. One potential challenge could be the falling rupee, which may exacerbate already-high inflation.

ANZ's India FX strategist and economist, Dhiraj Nim, stated that the central bank may utilize its foreign exchange reserves to bolster the rupee while simultaneously implementing rate reductions.

He stated that the Reserve Bank of India has been clear in distinguishing the tools used for foreign exchange policy from those used for the domestic economy in the past.

"The RBI is not likely to keep interest rates high for an extended period due to depreciation pressure on the rupee, but it may not be significant enough to cause a major impact."

Bank of Korea

Last month, the Bank of Korea unexpectedly reduced its benchmark interest rate by 25 basis points, marking the first time the central bank has made two consecutive cuts since 2009. The move was aimed at stimulating the economy as growth concerns persist in South Korea.

The central bank of Korea is attempting to maintain its currency while simultaneously promoting economic growth, similar to many of its Asian counterparts.

While the Fed's latest rate outlook and resulting dollar appreciation may create short-term pressures, they are unlikely to disrupt the BOK's dovish course.

Park stated that the BOK is determined to prioritize growth and is confident in a strong economic recovery to attract capital inflows and strengthen the KRW in the medium term.

"The NPS is ready to increase its FX swap lines if required to maintain the stability of the KRW. Although this tool has never been employed, its existence serves as a reliable safeguard to counteract dollar strength and protect Korean enterprises from external disturbances."

Europe

On Thursday, European markets dropped in response to the Fed's comments, and currency markets also responded. Although the moves were less pronounced than in Asia, the euro strengthened by about 0.5% against the dollar and rose by 0.1% against the greenback. Meanwhile, the dollar weakened by around 0.4% against the euro.

Emerging markets are more impacted by Fed moves and dollar strength than central banks in the continent, which are less dependent on foreign investment and dollar-denominated debt.

European Central Bank

The European Central Bank (ECB) made its fourth rate cut this year, as anticipated, and reduced its inflation projections for the current and upcoming years.

ECB's response to Powell's comments is likely to be moderate but not zero, according to Matthew Ryan, head of market strategy at Ebury. Ryan added that the bank is more likely to be influenced by Trump's policies.

Ryan stated on CNBC Thursday that the U.S. and euro zone economies have contrasting outlooks for next year, with the euro zone's growth remaining fragile and susceptible to harsh trade policies.

He stated that the largest effect of Trump 2.0 will be slower growth.

The ECB is expected to adopt a more dovish approach and reduce rates even further in the next year, with money markets forecasting a decrease in the key ECB rate to 1.75% by October 2022, from its current level of 3%.

If the dollar strengthens to match the euro, the ECB may slow its rate of easing, according to Ryan.

Swiss National Bank

The Swiss central bank has exceeded expectations with a 50-basis-point reduction in its main rate, bringing it to 0.5%, as it continues to cut rates.

The SNB might adopt a more hawkish stance due to a stronger dollar and weaker Swiss franc, as predicted by Ryan.

Ryan stated that the SNB lacks sufficient space to further decrease rates and going back to negative rates is something they want to avoid. A stronger dollar could potentially assist them in this regard.

Last week, Martin Schlegel, the new chair of the central bank, informed CNBC's Carolin Roth that the bank may consider implementing negative interest rates to maintain inflation within the range that supports price stability.

Bank of England

The Bank of England kept rates steady at its final meeting of the year, but markets were taken aback by the significant disagreement among policymakers.

Despite the bank's slow movement on rate cuts next year, money markets are now pricing in approximately 50 basis points of upcoming cuts.

According to Lindsay James, an investment strategist at Quilter Investors, the effect of the Fed's comments on the Bank of England is likely to be minimal, as there was little market repricing following the announcement.

She stated that a higher dollar could increase inflation on imported goods, which would slow down the pace of cuts.

The risks of tariffs are causing the Fed to become more hawkish, as lower growth and inflation can lead to fewer interest rate cuts, according to a source who spoke to CNBC over the phone.

"If both sterling and euro weaken further against the dollar, it could result in higher imported inflation, particularly on fuel and to a lesser extent on food. This would restrict the banks' ability to reduce interest rates."