WASHINGTON/TOKYO — Global financial markets are heading into a pivotal week as the U.S. Federal Reserve and Bank of Japan prepare to make closely watched interest-rate decisions amid renewed inflation pressure, rising oil prices and heightened volatility in currency and bond markets.
The Federal Reserve is scheduled to meet on September 15–16, followed shortly afterward by the Bank of Japan’s policy meeting on September 17–18. Investors are watching not only the decisions themselves but also how both central banks signal their next moves.
The stakes are particularly high because markets have been forced to reassess expectations for monetary policy as energy prices surge and inflation remains persistent.
Fed faces inflation challenge
The U.S. Federal Reserve enters its meeting under pressure from stubborn inflation and rising energy costs.
Recent market pricing has shifted sharply toward expectations of a 25-basis-point Fed rate increase this week. Reuters reported that traders were assigning an approximately 86% probability to a hike following stronger-than-expected U.S. inflation data.
That would represent a significant change in expectations and could reinforce the message that the Fed remains focused on containing inflation despite pressure for easier monetary policy.
Higher oil prices are complicating the picture. Brent crude recently moved above $100 a barrel, adding to concerns that energy costs could keep inflation elevated for longer.
The Fed therefore faces a difficult balancing act: tightening policy could help contain inflation but could also increase borrowing costs and weigh on economic activity.
BOJ prepares for another possible hike
The Bank of Japan faces a different challenge.
After years of ultra-loose monetary policy, the BOJ has been gradually moving toward normalization as inflation becomes more persistent and wage and price pressures remain elevated.
BOJ Governor Kazuo Ueda said earlier this month that the central bank would consider a September rate increase, with the decision dependent on its assessment of inflation and economic risks.
Markets have increasingly priced in a 25-basis-point increase, potentially taking the BOJ’s policy rate to 1.25%. Reuters reported that sources familiar with the central bank’s thinking expected a September hike while noting that policymakers could provide limited guidance on the pace of future increases.
A BOJ hike would be particularly important for the yen and global bond markets because Japanese investors hold substantial overseas assets.
Yen and dollar in the spotlight
Currency markets are already reacting to the possibility of divergent policy moves.
The yen has strengthened considerably this month as traders anticipate a BOJ rate increase, while expectations of tighter U.S. policy have also affected the dollar and Treasury yields. Reuters reported that the yen was trading near a seven-month high ahead of the two central-bank meetings.
The outcome could therefore have consequences far beyond Japan and the United States.
A more hawkish BOJ could support the yen, while a stronger-than-expected Fed tightening signal could boost the dollar and keep U.S. borrowing costs elevated.
Why markets are nervous
The biggest concern for investors is uncertainty over what comes after this week’s decisions.
A rate increase from either central bank is only part of the story. Markets will closely examine policymakers’ language for clues about whether additional hikes are likely.
That is especially important because rising energy prices are creating a difficult environment for central banks. Higher oil costs can push inflation higher while simultaneously weakening household purchasing power and economic growth.
U.S. Treasury yields have already climbed sharply, with the 10-year yield approaching 5%, adding pressure to financial markets and raising the cost of government and private-sector borrowing.
One week, two central banks, global consequences
The Fed and BOJ decisions could become a major test of investor confidence.
For the Fed, the question is whether policymakers will prioritize persistent inflation even as financial conditions tighten.
For the BOJ, investors want to know whether Japan is prepared to accelerate its long-awaited monetary-policy normalization.
The two decisions could also influence the dollar, yen, global bond yields, stock markets and borrowing costs across Asia and beyond.
With markets already repositioning ahead of the meetings, even a small change in central-bank language could trigger a much larger reaction.
The decisions are coming within days. The bigger question for markets is what the Fed and BOJ will signal about the months ahead.
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