No cuts view strengthened on data – Nordea

Nordea’s Ole Håkon Eek-Nielsen and Jan von Gerich, reiterates their call for no interest rate cuts from the Federal Reserve. Strong US growth, a tight labour market, a weaker Dollar and higher commodity prices are seen limiting disinflation. Nordea also expects higher long-end US yields as deficits stay large.

Nordea doubles down on Fed on-hold

“We keep seeing no cuts from Fed. With decent growth momentum in an economy with a weak supply side in the labour market, it seems likely that unemployment will stay at low levels. With a weakening USD, higher commodity prices and perhaps some way to go on tariff effects, it seems far from obvious that inflation eases all the way to 2% either.”

“Unchanged interest rates from Fed would surprise markets, even though the amount of expected cuts have eased a bit since last autumn. We also see long end rates going higher, partly given the “sell America” trade going further, but also from high public deficits in western countries and weaker demand side given an increasing share of the population in retirement age.”

“Reducing the balance sheet would probably run into higher and more volatile spread between SOFR and the Fed funds rate, at least if no other major changes were done to bank regulation. Higher long end rates would also seem likely. Both these consequences might be contained by sufficient short end rate cuts, but that is most likely reliant upon no big increase in inflation expectations.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)