Weekly focus – Also the Fed turns hawkish

Like the European Central Bank last week, the US Federal Reserve was in a tightening mood this week. A 25bp rate hike was not a surprise for markets, but it was surprising that the decision was taken by a unanimous monetary policy committee, and that the member's economic expectations (the so-called dot plot) showed near consensus for one more hike this year and a large minority expecting one more hike in 2027. Fed chairman Kevin Warsh repeated several times that current monetary policy is accommodative also after the hike. Hence, we expect two further hikes before next summer, and short-term market interest rates increased further. However, long-term yields have if anything declined this week. The rate hike and the hawkish signal from the Fed underlines the central bank's independence from politics.  US president Donald Trump has made it very clear that he thinks rates should be cut, not raised, but the President's attempts to create a Fed that would deliver that have mostly failed.

In our view, the Fed's move reflects the surprising strength of demand in the US economy. Consumer spending that has continued to grow despite stagnating real wages, very large AI-related investments, and loose fiscal policy continue to add to inflation pressures even though interest rates are high enough to significantly dampen housing investment and the housing market more broadly. It is also related to the increase in energy prices which the Fed, like other central banks, worries can turn into more sustained inflation pressure. On this, there was a little relive during the week as oil prices declined following their spike last week. However, with a Brent oil price above USD 100/bbl and very elevated prices of oil products, especially diesel, the concern very much persists. In Europe, gas prices also declined a little but remained high and remain key to watch for European interest rates.

Not all central banks are surprising to the hawkish site, though. The Bank of Japan delivered the 25bp rate hike that was expected of it. However, there had been speculation of a 50bp "jumbo hike" and the two board members appointed by PM Takaichi voted against hiking at all, indicating that it is not a straight road towards higher rates from here. The Bank of England triggered a drop in market rates as it made no change to the Bank Rate and did not sound like it had become more willing to hike, unlike the Fed and the ECB. At 3.75%, we still see the policy rate as restrictive and the case for aggressive UK hikes as weak.

Central bank excitement moves closer to our Nordic home next week, when both the Norwegian and Swedish central banks make rate announcements where the result is not given in advance. That is especially so for Norway where it is almost 50/50 if we get a rate hike or not, see also page 2. In terms of economic data, we get preliminary PMIs for most major economies. That will be especially interesting in the euro area, where surprisingly strong growth over the summer has made it easier for the ECB to tighten monetary policy, and it will be interesting to see if the momentum increases especially in manufacturing.

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