As we navigate through 2025, global central banks are grappling with a complex array of domestic and international challenges. The Federal Reserve's (Fed) policy decisions, alongside domestic economic dynamics, will continue to influence central bank monetary strategies, while global volatility and trade tensions have amplified uncertainty. 

For cash investors, the current environment presents challenges and opportunities. Elevated interest rates are likely to continue offering attractive yields, but recent volatility suggests caution and diversification across different maturities and instruments are recommended to achieve optimal risk-adjusted returns.

US: Exceptionalism to uncertainty

The US administration’s latest tariffs have dominated global headlines and triggered a significant negative global market reaction.

Behind the headlines, the US labour market remains strong but has shown early signs of cooling, with attention turning to the potential employment impact of government cost-cutting. Tighter immigration policies may also reduce labour supply, increasing wage pressure and slowing consumption growth. These employment trends – especially in consumer-sensitive sectors – are important to monitor as indicators of overall economic health.

Tax cuts and deregulation could also influence fiscal dynamics and economic growth. The potential expiration of the 2017 Tax Cuts and Jobs Act and proposed changes to tax policy could provide modest support to the economy and avoid a fiscal cliff, though any additional tax cuts may be limited by deficit concerns. Meanwhile, potential deregulation may support business growth later in the year.

Overall, there are growing concerns that even if fiscal support materialises, it may not be sufficient to offset near-term uncertainty from cost-cutting and trade policy.

Federal Reserve challenges

The Fed is currently on pause, assessing the impact of recent policies on inflation, growth and employment. Leading indicators and surveys signal consumers and businesses caution, but policymakers will likely wait for confirmation from hard data before acting.

While the tariffs are likely to boost US inflation, we believe this will be temporary and the Fed will tolerate this short-term price spike, instead focusing on the longer-term impacts. Slower GDP growth is anticipated in the first half of the year with a potential mild rebound later, largely dependent on the timing and effectiveness of fiscal and regulatory measures.

As a result, rate policy may remain on hold in the near term until the economic impact of tariffs becomes clearer. Market expectations show three rate cuts priced in for 2025, though this number could rise if economic conditions weaken materially.

European markets

The sweeping US trade tariffs have rattled global financial markets, with Europe being no exception.

Over recent months, the European Central Bank (ECB) has overseen a gradual decline of inflation dynamics, allowing it to loosen monetary policy substantially from mid-2024 highs. Meanwhile, the removal of the German fiscal debt break and increased regional spending on defence are regarded as positives for economic growth.

However, the unpredictability of the tariff environment raises the risk of deeper market dislocation, with ECB President Christine Lagarde estimating that the initial tariffs and subsequent retaliation could substantially reduce eurozone growth.

With stagflation and a global recession perceived to be more likely, the market is now forecasting yet more rate cuts in this current cycle, implying the ECB reduced the deposit rate to below 2% from 2.5%. A lower ECB deposit rate would also curtail a strengthening euro and its disinflationary impact.

UK markets

The UK has so far been spared the most aggressive tariffs, but a 10% blanket rate will still create a drag on growth and adds to market uncertainty. The delay in reciprocal US tariffs offers some breathing room, but much depends on the outcome of ongoing negotiations.

Domestically, economic data remains mixed, the labour market appears tight while services inflation has proven sticky. The Bank of England has started cutting its base rate as inflation declined from cycle highs. However, the central bank is walking a fine line, balancing the need to monitor upside inflation risks while remaining prepared to support the economy if conditions deteriorate. The government’s fiscal limitations make monetary policy the primary lever for responding to shocks, which increases the importance of market liquidity.

Asia Pacific markets

Historically, APAC central banks have tended to follow the Federal Reserve's lead. Since regional base rates peaked last summer and the Fed began its cutting cycle, we have seen several APAC central banks follow suit by reducing interest rates. Softer economic growth and moderating inflation across the region have supported this dovish tilt. However, lingering inflation concerns and worries about currency weakness and capital flight have prevented central banks from removing policy restrictiveness too fast or too soon.

These steady, predictable dynamics have been significantly disrupted by the imposition of unexpectedly high US trade tariffs across the region. Trade and economic growth are predicted to slow sharply, though the extent will vary based on specific tariff levels and trade volumes with the US. Inter-regional trade is also likely to be affected as demand for commodities decreases and supply networks face strain.

While we believe tariffs pose significant downside risks to regional growth, the impact on inflation remains uncertain. Nevertheless, as regional central banks shift their focus from containing inflation to supporting growth, we anticipate an acceleration in interest rate cuts. Although, concerns about capital flows and currency volatility may initially hinder rapid rate reductions.

Investor implications

Across global markets, 2025 is shaping up to be a year defined by policy-driven uncertainty, cooling growth, and elevated inflation risks. With mixed signals from central banks and delayed fiscal clarity, investors are navigating a complex environment.

Amid this volatility, we believe cash investors should remain vigilant, focusing on their core investment principles of liquidity, security, and yield. Money market strategies continue to present a compelling option, especially in a high policy rate environment. For those with a slightly longer investment horizon, ultra-short duration strategies provide an opportunity to benefit from elevated yields and tactical positioning.

Across our liquidity strategies, we maintain a bias toward high-quality credit and a diversified duration profile, helping clients stay defensively positioned while still seeking returns.

Source: Bloomberg and J.P. Morgan Asset Management, as at 16 April 2025.