The Federal Reserve and European Central Bank are both losing control over monetary policy as oil prices shoot up and President Donald Trump moves the US closer to war with Iran.
What used to be clear decisions by central banks are now overshadowed by politics, inflation, and a collapsing framework of economic rules. Markets don’t know what to react to anymore, because the banks themselves are lost.
This came to a head on Thursday after Norway cut interest rates without warning. The decision shocked traders and pushed the Norwegian crown down about 1% against both the dollar and the euro.
At the same time, Switzerland cut its rates to 0%, scrapping talk of returning to negative rates despite persistent deflation.
The Swiss central bank said the global outlook was too unstable to follow normal plans. Just 24 hours earlier, Fed Chair Jerome Powell kept US rates unchanged and told reporters that “no one” has confidence in where rates should go.
Markets react to panic, not policy
Investors immediately pulled out of stocks. European equity volatility, tracked by the V2TX, jumped to a two-month high. But instead of buying government bonds as a safe bet, they sold those too. Traders saw no clear direction. Even the usual havens are failing.
“We’re at a moment of considerable policy and macro uncertainty,” said Mark Dowding, chief investment officer at RBC Global Asset Management’s BlueBay. “We can’t see a clear trend on interest rates.” He admitted he was holding off on making major moves across his firm’s portfolios.
The dollar is now a wildcard. Its value has dropped almost 9% this year against other major currencies. But that changed after military conflict broke out between Israel and Iran, sending the dollar rising again. Every movement now is driven by war headlines and energy shocks, not central bank guidance.
“You cannot just take your cues from the central banks anymore,” said Davide Oneglia, director of macro at T.S. Lombard. He said the banks are struggling just to read the data, let alone give direction.
Broken models leave Europe trailing Trump’s inflation
European central banks cutting rates are not just moving differently from the Fed, which is still wrestling with rising prices caused by Trump’s tariffs. They’re also dealing with a volatile dollar, which used to anchor global trade and commodity prices. That’s no longer working.
“That’s a massive, massive fundamental shift in global markets that everyone is trying to assess,” said Nick Rees, head of macro research at Monex Europe. “All of those standard economic rules of thumb we use for forecasting are completely broken right now.”
At the European Central Bank, even planned rate cuts are under review. Francois Villeroy de Galhau, a key ECB policymaker, said on Thursday that if oil volatility keeps going, they might have to change course. That puts the entire monetary plan in doubt.
The big picture is simple: central banks can’t lead when the ground keeps moving. Analysts said the new market environment is shaped by surprise events, not policies. With every escalation involving Iran, the chance of sudden pricing changes grows. Investors have to brace for that.
“We’re getting into this next cycle in which variables are much more volatile, because, rather than (monetary policy) being just easily predictable, events just take over and policy and human factors, as we now know with Donald Trump, play an important role,” Oneglia said.
Every piece of this matters. Currency values have shifted dramatically in just a few months. Models don’t work. Central banks can’t promise anything. Trump is making the biggest decisions from the White House, and Iran is the wild card no one can price in.
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This articles is written by : Nermeen Nabil Khear Abdelmalak
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