For more than a decade, central banks around the world have been implementing extraordinary measures to mitigate the economic impact of previous crises. This has resulted in policy interest rates near the lower bound and large balance sheets. It is from this unusual starting point that central banks have embarked on the journey down the path of policy normalisation. This happens against a background of ongoing economic recovery with signs of overheating as well as high inflation in a context of great uncertainty due to exogenous shocks like the war in Ukraine, further possible COVID-19 waves and supply bottlenecks.

This article focuses on two central banks: the European Central Bank and the Federal Reserve. It analyses and compares the ongoing normalisation process in the euro area and the US in uncertain times. It explores why the ECB and the Fed are following a different pace in their normalisation process. It also discusses some of the challenges faced by these two central banks, notably regarding the economic outlook and financial stability, while steering monetary policy back to a more neutral stance.