Federal Reserve: Further hikes supported by resilient economy – Nordea

Nordea strategists expect the Federal Reserve (Fed) to deliver two additional rate hikes, arguing that resilient United States (US) growth, persistent inflation and continued labour-market strength suggest monetary policy is not yet sufficiently restrictive. They also see AI-related investment and competition for scarce labour and other resources as factors that could sustain wage and inflation pressures.

Resilient US data backs more tightening

"The US economy remains resilient, while inflationary pressures show few signs of easing. With the labor market also holding up well, the case for a more restrictive monetary policy stance is strengthening. While we maintain our forecast for two more hikes, we see the risks as tilted to the upside."

"All in all, monetary policy does not appear sufficiently restrictive given the strength of the economy. Persistent inflation pressures, combined with a resilient labor market, argue for a more restrictive policy stance. The Committee appears to recognize this, with the median dot for year-end now implying another hike."

"We expect this hike to be delivered, followed by another hike next year, as inflationary pressures are likely to persist. The risks to our rate outlook remain tilted to the upside."

"Given the limited supply of new labor, continued job growth could further tighten the labor market and put downward pressure on the unemployment rate. Warsh reaffirmed this assessment at the press conference, noting that the US economy is operating at more or less full employment. Combined with strong economic growth, continued labor market strength could eventually translate into faster wage growth and renewed wage pressures, making inflation more persistent."

"Secondly, AI-related demand remains massive, with investment flowing into the economy and supporting overall demand. The buildout of data centers is competing for scarce resources, including electricity, commodities and construction capacity. Data centers are also competing with factories for skilled workers such as electricians and engineers, with the Fed specifically noting higher wages in specialty construction trades linked to the AI buildout."

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