Fed: Cuts questioned as inflation risks build – Nordea

Finance

Fed: Cuts questioned as inflation risks build – Nordea

Nordea analysts Ole Håkon Eek-Nielsen and Jan von Gerich argue that higher energy and commodity prices, together with tight labour markets and solid demand, make Federal Reserve (Fed) rate cuts unlikely. They highlight persistent inflation near 3%, wage growth around 4% and potential AI-driven investment as factors that could turn the Middle East shock into more lasting United States (US) inflation, supporting an unchanged Fed policy rate outlook.

Higher inflation risks keep Fed cautious

“Since the war in the Middle East started in February, markets have taken out the cuts that were priced in for 2026.”

“Even with a great deal of uncertainty with regards to the magnitude of the energy shock that we have in front of us, it seems fair to assume that we will see an increase in inflation going forward.”

“If we see a lack of both commodities and labour going into this, it seems far from certain that we can avoid inflation of the more sticky type to emerge from the Middle East impulse.”

“Powells comment at the FOMC in March might give some clue to this: ”If clear progress in slowing inflation is not confirmed, we do not intend to implement rate cuts“.”

“We have been forecasting unchanged Fed target rate for a while now, the only difference now is that the market almost agrees with us at least for 2026.”