The world's major central banks are presenting a sharply divided macroeconomic picture this week: while the Fed and ECB remain in cautious wait-and-see mode amid sticky inflation and elevated energy costs, the Bank of Israel is expected to cut rates next week.

Fed: Stuck in Place — No Cuts in Sight

The federal funds rate remains at 3.50%–3.75% following a string of unchanged decisions since the start of 2026. The CME FedWatch Tool now prices a 71.5% probability of zero cuts through December 2026.

Bank of America published a stark outlook: "No cuts until July–September 2027." Goldman Sachs has pushed its first cut to late 2026 at the earliest, while J.P. Morgan has flagged the possibility of a rate hike in 2027. Inflation remains elevated: March CPI stood at 3.3%, with core PCE around 3.2%, largely driven by rising energy prices amid tensions with Iran.

Lyn Alden noted in her recent analyses that the U.S. has entered a "gradual print" era — modest Fed balance-sheet expansion underpinned by fiscal dominance. "Most portfolios are not built for a stagflation and fiscal dominance regime," she warned.

She added that the anticipated Fed chair transition — Kevin Warsh's nomination — could shift the trajectory: "If Warsh is confirmed, he may shrink the balance sheet and mute the gradual print effect."

Europe: Inflation Running Hot, ECB Under Pressure

In the eurozone, annual inflation jumped to 3.0% in April, up from 2.6% in March — well above the ECB's 2% target. Energy prices surged 10.9% year-on-year.

President Christine Lagarde has signaled that rate hikes are a "live option" if pressures persist. Markets now price one or two 25-basis-point hikes in 2026, with the June meeting widely seen as the most likely timing for the first move.

Nomura published a cautious research note: "War-driven inflation keeps hikes on the table." However, the firm's analysts emphasized that growth risks warrant a measured approach, and they expect the ECB to wait before taking aggressive action.

Bank of Israel: Bucking the Trend

While the Fed and ECB are stuck, the picture in Israel is notably different. Annual inflation held at 1.9% in April — within the 1%–3% target band for the ninth consecutive month. The shekel strengthened 0.8% against the dollar in Q1, helping contain imported inflation.

Israeli banks have already begun trimming deposit rates in anticipation of the May 25 decision. Markets widely expect the Bank of Israel to cut rates to 3.75% — marking the third cut this year (from 4.25% to 4.00% in January).

David Beckworth, a leading monetary policy expert at the Mercatus Center, published a May policy brief on the NGDP gap as a practical tool for evaluating whether macro policy is expansionary or contractionary. He continues to advocate for NGDP-level targeting as a robust framework for central banks navigating supply shocks.

Bond Yields and FX Markets

U.S. 10-year Treasury yields are trading around 4.61%, up modestly from 4.47% in mid-last week, as markets price in higher-for-longer rates.

The dollar index (DXY) is trading around 99.14 — a mild decline — while the euro strengthened slightly against the dollar to 1.164.

Nomura's FX strategy team noted that Middle East tensions continue to support the dollar through safe-haven flows, but if pressures ease in H2 2026, the dollar could weaken alongside a strengthening yen driven by BoJ rate hikes.

The Bottom Line

This week offers a contrasting mirror between the major central banks: the Fed in a holding pattern, the ECB under mounting inflationary pressure, and the Bank of Israel with room to ease. The key variable going forward — for both markets and central banks — will be the inflation data due in the coming weeks, particularly the impact of energy prices on the real economy.