The Bank of Japan's decision to hold rates, perceived as politically motivated, causes it to fall further "behind the curve" on inflation. This inaction could erode market confidence to the point where even future hawkish communications are ignored, suggesting the central bank is losing control of the market narrative.

The Fed's latest projections are seemingly contradictory: they cut rates due to labor market risk, yet forecast higher growth and inflation. This reveals a policy shift where they accept future inflation as a necessary byproduct of easing policy now to prevent a worse employment outcome.

The Fed's recent rate cuts, despite strong economic indicators, are seen as a capitulation to political pressure. This suggests the central bank is now functioning as a "political utility" to manage government debt, marking a victory for political influence over its traditional independence.

Former RBI Governor Raghuram Rajan points to a historical pattern preceding every major financial crisis: a U-shape in monetary policy. An extended period of easy money builds up risk, and the subsequent tightening phase triggers the collapse. This framework helps identify periods of heightened systemic vulnerability.

Rajan argues that a central bank's independence is not guaranteed by its structure but by the political consensus supporting it. When political polarization increases, institutions like the Fed become vulnerable to pressure, as their supposed autonomy is only as strong as the political will to uphold it.

While political pressure on the Federal Reserve is notable, the central bank's shift towards rate cuts is grounded in economic data. Decelerating employment and signs of increasing labor market slack provide a solid, data-driven justification for their policy recalibration, independent of political influence.

Even if US inflation remains stubbornly high, the US dollar's potential to appreciate is capped by the Federal Reserve's asymmetric reaction function. The Fed is operating under a risk management framework where it is more inclined to ease on economic weakness than to react hawkishly to firm inflation, limiting terminal rate repricing.

The Takaichi government has a political incentive to support the Bank of Japan's monetary normalization. Allowing inflation and yen depreciation to continue unchecked could undermine consumer confidence and her high approval ratings. Therefore, a gradual BOJ rate hike could be seen as a politically astute move to maintain stability and popular support.

The Federal Reserve can tolerate inflation running above its 2% target as long as long-term inflation expectations remain anchored. This is the critical variable that gives them policy flexibility. The market's belief in the Fed's long-term credibility is what matters most.