According to Nordea analysts Ole Håkon Eek-Nielsen and Jan von Gerich, the Federal Reserve is likely to implement three additional rate hikes over the coming quarters in order to bring inflation back to its target level [1]. The analysts cite several key factors supporting this outlook, including falling unemployment, constrained labor supply, and rising core PCE and service price inflation [1]. They emphasize that wage pressures and higher goods prices could further justify additional policy tightening by the Fed [1].
The analysts note that the ultimate decision on interest rates will depend on the trajectory of unemployment and inflation, referencing the June-meeting minutes which indicated that, in the case of a stable labor market and persistently elevated inflation, 'almost all of these participants indicated that some policy firming would likely be warranted' [1]. They also highlight that if government employment rebounds, job growth could be sufficient to push unemployment even lower, especially given the weak growth in labor supply [1].
Nordea's view is that the labor market is expected to remain stable or potentially strengthen further, aligning with the scenario considered by FOMC members [1]. The analysts warn that this could lead to higher wage pressure and stronger service price inflation, reinforcing the case for further rate hikes [1].
CONCLUSION
Nordea analysts anticipate that the Federal Reserve will pursue three more rate hikes, driven by a strong labor market and persistent inflation pressures. The outlook suggests continued policy tightening as the Fed seeks to achieve its inflation target, with labor market dynamics playing a central role in future decisions.