​President Trump’s attempt to remove Federal Reserve Governor Lisa Cook marked one of the most serious confrontations between the White House and the Fed in decades. The move triggered legal challenges and intensified debate about the independence of US monetary policy, raising concerns that political interference could damage the central bank’s credibility. The timing was notable: just days earlier, Chair Powell used Jackson Hole to signal that the “balance of risks” was shifting toward weaker growth and that the Fed was prepared to cut rates if conditions worsened. A month ago, market participants were almost unanimous in expecting a 25bps cut in September, but sentiment has since fragmented. While many still anticipate a modest move, fading optimism about growth has led some investors to push for a deeper 50bps cut, while others are no longer convinced that there will be a cut. The upcoming meeting and the legal drama around Cook will be a key test of both policy direction and institutional autonomy.
Markets have responded with a mix of caution and positioning for easing. Equities largely shrugged off the political drama, supported by strong earnings momentum and ongoing enthusiasm for artificial intelligence. Nvidia’s Q2 earnings call delivered a sharp revenue increase, underscoring relentless demand for AI infrastructure, though management tempered expectations by warning of lower data centre sales in Q3. The stock’s results highlighted both the strength and the fragility of the AI trade, which continues to anchor broader equity sentiment. Meanwhile, Treasuries and gold drew safe-haven inflows as governance risks rose, with the 10-year Treasury yield slipping toward 4.25% as conviction in near-term cuts grew. The debate over whether the Fed opts for 25bps, 50bps, or no cut at all in September is keeping volatility elevated across rates markets, even as equities lean on AI-driven growth to offset policy uncertainty.

​So far, 2025 has been shaped by sharp swings in financial markets, driven by geopolitical shocks, shifting monetary policy expectations, and evolving macroeconomic conditions. The year began with strong risk appetite, fuelled by optimism over disinflation and AI-led corporate growth, but momentum faltered in April when the US announced sweeping “Liberation Day” tariffs, reigniting fears of a global trade war. Equity markets corrected sharply before stabilising in early summer, supported by resilient corporate earnings and easing volatility. Inflation has proven stickier than expected in most major economies, prompting central banks, especially the Fed and the BoE, to delay or temper rate-cut expectations. The US dollar weakened in the first half of the year, boosting gold prices to multi-year highs as investors sought safe-haven assets. Overall, 2025 has presented a complex mix of resilience and risk, leaving investors to navigate an unusually uncertain macroeconomic and geopolitical backdrop.
Inflation trends in 2025 have underscored the challenge facing central banks in the United States, the Euro Area, and the United Kingdom, with price pressures proving more persistent than policymakers had anticipated. In the US, headline CPI has eased from its 2022 and 2023 peaks but remains above the Federal Reserve’s 2% target. While core inflation has been slower to decline, driven by stubborn services and shelter costs. The Euro Area has seen a similar pattern, with headline inflation moderating on the back of lower energy prices but core readings staying elevated due to wage growth and resilient domestic demand. The UK has faced the stickiest inflation among the three, with both headline and core measures remaining well above target despite easing commodity costs—reflecting underlying pressures in the labour market and housing sector. As shown in Figure 1, inflation has come down substantially since 2023, the Euro Area is the only geography of the three that has maintained an inflation rate at or below 2% for multiple months. In contrast, the UK’s inflation rate has begun to soar again and remains well above 3% in recent months.
Interest rate policy has reflected these dynamics, with the Fed and the BoE both delaying widely expected rate cuts as inflation progress slowed in the first half of the year. The Fed has maintained rates at close to their multi-year highs, emphasising the need for sustained evidence of disinflation before easing. The BoE has lowered its interest rates more steadily in 2025 than the US, but the country has to balance cuts with currently rising inflation. In contrast, the European Central Bank has begun to signal a cautious easing path, supported by weaker growth data and a more pronounced decline in headline inflation across the bloc. Elsewhere, Japan’s policy shift away from ultra-loose conditions has stood in sharp contrast, underscoring the divergence in global monetary stances and adding a further layer of complexity to capital flows and currency markets in 2025.