Nordea analysts now expect the Federal Reserve to keep its key policy rate unchanged through 2026, warning that higher energy prices and geopolitical tensions are locking in stronger inflation pressures than previously assumed.
In a note, Nordea’s Joachim Eek-Nielsen and Jan von Gerich said inflation is likely to hover near 3% while wage growth stays around 4%, leaving little room for rate cuts. Their call aligns with a broader market rethink that has pushed back expectations for policy easing well beyond this year.
Rate cut hopes fade as inflation outlook shifts
The conflict in the Middle East, which escalated in February, has already forced markets to unwind earlier bets on early Fed cuts. That shift mirrors the message from Fed Chair Jerome Powell, who said in March that the central bank needs clear and durable evidence of slowing inflation before considering any rate reductions.
Nordea’s analysts argue that the latest energy shock may prove more persistent than previous swings. They highlight the risk that disruptions to energy and commodity supplies could outlast the initial shock if shortages endure across several sectors.
Middle East conflict and energy shock drive repricing
Eek-Nielsen and von Gerich point to a combination of tight labor markets, solid demand, and rising AI-related investment as forces that could reinforce inflation rather than dampen it.
According to their analysis, commodity bottlenecks and labor shortages may keep price pressures elevated beyond what would typically result from one-off external shocks. Against this backdrop, Nordea is maintaining its view that the Fed’s policy rate will remain unchanged, a stance they note is now broadly reflected in market pricing for the year ahead.
Tight labor market and AI spending seen as inflation amplifiers
Recent government data back up Nordea’s concerns. The annual inflation rate for the 12 months to March rose to 3.3%, up sharply from 2.4% in February. The move was driven largely by a 12.5% year-on-year surge in energy costs, directly linked to the geopolitical tensions that intensified from February onward.
West Texas Intermediate crude is trading around $89 a barrel, up more than 35% in less than two months, underscoring how international hostilities have reshaped the energy landscape. Powell’s insistence on securing a “firm grip” on inflation before easing now appears more relevant, as futures markets currently see the federal funds rate holding near 3.6% into early 2027.
Latest data confirm renewed inflation momentum
The labor market continues to show resilience. The unemployment rate has slipped to 4.3% as the economy added 178,000 jobs last month, beating many expectations. Initial claims for unemployment benefits fell to 207,000 last week, pointing to limited layoffs.
This strength gives the Fed more room to keep policy tight. With employment still expanding and job losses contained, there is less pressure on policymakers to move quickly to support growth.
Labor market remains firm despite higher rates
Wage dynamics remain another key element of the inflation picture. Nominal average weekly wages rose 3.5% over the past year, only marginally faster than consumer prices. That leaves many households with limited real income gains and suggests wage growth is strong enough to support demand but not high enough to quickly erode inflation-adjusted debt burdens.
For the Fed, wage growth near 4% is consistent with Nordea’s view of inflation settling around 3%, a level that would justify keeping policy restrictive for longer.
Wages barely outpacing prices
In this environment, where capital stays expensive and the policy outlook skews toward “higher for longer,” assets that rely heavily on distant growth narratives rather than current cash flows face a tougher backdrop.
Elevated yields on safer, interest-bearing instruments are raising the bar for risk-taking. As borrowing costs climb and speculative activity loses appeal, markets could see continued pressure on assets known for sharp price swings and stretched valuations.
Higher-for-longer rates challenge growth-dependent assets
For traders, Nordea’s unchanged rate outlook and the reinforcement from recent data suggest a regime where restrictive monetary policy persists and volatility in rate expectations stays high.
Positioning strategies will likely need to focus more on balance-sheet strength, dependable cash flows, and exposure to sectors less sensitive to financing costs. Assets that are not anchored by traditional valuation metrics may remain under strain as hopes of a rapid pivot to lower rates recede.
The once-dominant narrative of swift and large-scale Fed cuts has, for now, been pushed aside by a combination of stubborn inflation, firm labor markets, and a renewed energy shock.
For deeper insight into how rate decisions shape crypto, explore our guide on interest rates and Bitcoin today.
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