Looking at the macroeconomic landscape, central banks are facing a discouraging trend of stubbornly high core inflation, renewed activity in the interest rate sensitive housing sector, secularly tight labour market dynamics and strong consumers. On top of that, the macroeconomic trend has also eased financial conditions, which risks fuelling this counterproductive trend even further.
Without an economic shock that reverses the current macroeconomic trend, odds are that central banks will have to keep lifting interest rates until they bring us back on a path that slows down the economy enough to bring inflation back down to 2% on a sustained basis.
At the June FOMC meeting the Federal Reserve kept the fed funds rate unchanged at 5.25%, but lifted its fed funds rate projection to 5.75% for the end of the year. With the current trend in economic data, this was not a big surprise. The committee signalled that inflation has stayed surprisingly high and it also backtracked on its previous view that the banking sector stress would have an impact equivalent to 25-50bp interest rate hikes. Barring a sudden shock to the economy, this clearly suggests that the Federal Reserve is likely to keep hiking interests
- Nordea
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