I think the market has not taken the economic reality into account.
The US central bank (Fed) will probably have to raise interest rates more than expected. That’s what Nordea Markets writes in a fresh note.
Strong growth and high inflation still characterize the American economy. Therefore, the investment bank has no faith in one more “duet”“duet”“Hawkish” and “duet” describe opposite beliefs about what interest rates the financial picture requires. A “hawk” supports higher interest rates, while a “dove” wants lower interest rates stance from the Fed at first.
It does not rule out that the interest rate in the US could rise to 6 percent. It has not been this high since the beginning of the 2000s, shows an overview from Trading Economics.
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Slowed down the pace
The key interest rates are now 4.5–4.75 in the USA, after the central bank raised the interest rate by 0.25 percentage points at the beginning of February.
It thus slowed the pace of rate hikes, while Fed chief Jerome Powell warned against doing the same with the shoulders.
– We have more work to do, he said.
But economic data doesn’t just support Powell’s desire to keep interest rates high for an extended period. It also increases the likelihood that the central bank will have to reassess which interest rate level is restrictive enough, Nordea believes.
– Haven’t accepted reality
“The justification for higher interest rates has strengthened”, writes the bank.
It shows, among other things, that the American job market is still much stronger than expected. While economists had expected 188,000 new jobs in January, a total of 517,000 new jobs were created outside agriculture in the US last month.
Growth in the US economy has also beaten expectations. And although inflation has moderated since the peak in June 2022, 6.4 percent price growth in January was more than analysts had previously thought.
“The markets have not yet fully accepted this reality,” says Nordea.
The American economy is still at too high a temperature.
Necessary with regression
Core inflationCore inflationmeasures price growth excluding food and energy products is growing far faster than expected, and will probably continue at a high rate going forward, writes the bank.
And although inflation has peaked in this cycle, it is unlikely to fall to a comfortable 2 percent and remain there on a sustained basis.
For that to happen, the world’s largest economy must go from a state of too much demand to a state of shortage, the note concludes.
The Fed’s tightening has so far not had the desired effect. But the January figures at least indicate that the economy appears to be stabilizing, according to Nordea.
