The past few weeks have brought a dramatic shift in global monetary policy, and the three central banks most relevant to Israeli investors have each responded in their own way.

In Washington, the Fed under new Chair Kevin Warsh held its first rate decision and kept the federal funds rate unchanged at 3.50%-3.75%, but surprised markets with a significant hawkish revision to its economic projections, pointing to at least one rate hike by year-end.

In Frankfurt, the ECB went the other way: a 25 basis point hike, the first since 2023, bringing the deposit facility rate to 2.25%.

And in Jerusalem, the Bank of Israel is preparing the ground for another cut: prediction markets price a 91-92% probability of a 25bp reduction at the July 6 meeting.

The Weekly Picture

The 10-year US Treasury yield traded around 4.37%, a modest decline from monthly highs but still at levels reflecting "higher for longer" expectations. The DXY dollar index eased slightly to 101.37, while EUR/USD recovered to around 1.138. USD/ILS crossed the 3.00 threshold, a level not seen since early this year.

The biggest move came from commodities: oil prices plunged. WTI fell below $70 per barrel and Brent traded around $73.50, driven by growing optimism over a US-Iran ceasefire agreement. If sustained, this decline could reshape the entire global inflation outlook.

The Fed's New Direction

The real surprise in June was not the hold itself, widely expected, but the dramatic update to the Summary of Economic Projections. The median federal funds rate projection for end-2026 rose from 3.4% to 3.8%, implying at least one hike this year. Of 18 committee participants, nine saw at least one increase.

"Inflation remains elevated relative to the Committee's 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy," the Fed statement said.

In a significant stylistic shift, Warsh cut the policy statement from over 300 words to roughly 130, removing forward guidance entirely. Short and to the point, a style reminiscent of the Greenspan era.

The ECB Reverses Course

The ECB raised its deposit facility rate to 2.25%, a unanimous decision by the Governing Council. The reason: eurozone inflation spiked sharply on energy price increases linked to the Iran war. Inflation forecasts were revised upward: 3.0% in 2026, 2.3% in 2027, and a return to the 2% target only in 2028.

What Analysts Are Saying

Lyn Alden, one of the leading macro voices on X, described the current environment as a "Wild West", an era where investors must abandon traditional 60/40 portfolios in favor of commodities and real assets.

"The Fed is entering a phase of gradual, modest liquidity support," she wrote. "About $20-40 billion per month, not massive printing, but enough to keep the banking system with ample reserves."

MacroAlf (Alfonso Peccatiello) focused on the liquidity side of markets, warning of a steeper yield curve if inflation risk premia rise.

David Beckworth of the Mercatus Center argued the Fed already has the tools to handle supply-driven inflation over time, and that the relatively measured market reaction to the Fed's projections shows confidence in Warsh's ability to steer the ship.

And the Bank of Israel?

The Bank of Israel prepares for its next rate decision on July 6. Inflation remains contained at 1.9% in April, within the 1%-3% target, and the stronger shekel supports cheaper imports. Prediction markets price a 91-92% probability of a 25bp cut.

With the current rate at 3.75% and the Bank of Israel's own forecasts pointing to 3.5% by end-2026, the trajectory seems clear: gradual monetary easing, contingent on geopolitical developments.

The Bottom Line

Three central banks are signaling a complex macroeconomic reality: energy-driven inflation requiring different responses in each region, a war that has changed the rules of the game, and investors searching for direction. The Fed signals "wait and see" with a hawkish lean, the ECB chose the opposite path, a hike, and the Bank of Israel continues its easing cycle.

The big question for the coming days: will the Iran ceasefire hold, and will cheaper oil succeed in bringing global inflation back toward target? If so, the current projections of all three central banks will need to change once again.