Central banks stay on hold as inflation and oil risks persist

In the US, the case for tighter policy is still the clearest. Inflation ran at 3.6% year on year in September, while GDP expanded at a 3.4% annualized pace in the third quarter, faster than the 2.2% pace in the prior quarter. Consumer spending and business investment remain resilient, which explains why two Federal Open Market Committee members backed a 25-basis-point hike. The rest of the committee is waiting for more certainty on the geopolitical backdrop, not for the domestic data to improve. That matters because a stronger economy alongside sticky inflation leaves the Fed with limited room to signal imminent easing.

For investors, that is a warning that the bond rally remains fragile. Ten-year US Treasury yields were still trading around 4.84%-4.95% this week, while the TLT bond ETF has recovered to about 81.9 after a rough year, but remains below its 200-day moving average. That technical backdrop suggests duration investors are pricing a slower disinflation path rather than a clean pivot to cuts. In equities, the message is similar: the S&P 500 dropped sharply in early November and is still trading below its recent highs, reflecting sensitivity to any repricing of rates.

The ECB faces a less comfortable mix. Unlike the US, the euro area does not have an AI-fueled investment boom to offset weak consumption, and its inflation problem is more closely tied to energy. That leaves the central bank exposed to any fresh rise in oil and gas prices if Middle East tensions intensify. A sustained supply shock would strengthen the case for keeping policy restrictive longer, even if growth remains soft.

The Bank of Japan remains the outlier, but not in a reassuring way. Japanese officials are warning about fresh inflationary pressure from higher energy prices, a weaker yen, wage growth and strong global demand for semiconductors and other AI-related products. That raises the odds of additional tightening, even as Japan’s large debt burden limits how far policymakers can go. A further slide in the yen against the dollar would feed imported inflation and could force the BOJ to act more decisively, a move that risks shaking carry trades and global bond markets.

That is why USD/JPY remains one of the most important market variables into year-end. A weaker yen would amplify imported inflation in Japan and could trigger broader volatility if leveraged positions unwind. On the other hand, a de-escalation in the Middle East would remove one of the main reasons central banks are hesitating, opening the door to a steadier policy path and, eventually, cuts in some economies.

For now, though, the balance of risks still points toward tighter-for-longer policy. That is bad news for long-duration bonds, a mixed outcome for equities, and a continuing headwind for gold if real yields stay elevated. The final central bank meetings of 2026 will not just set rates; they will reveal how much of the world’s inflation problem is now being driven by geopolitics rather than domestic demand.