LIVE MARKETS-Could the Fed stay on hold through 2026?

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COULD THE FED STAY ON HOLD THROUGH 2026?

According to the latest polling, analysts and strategists have some common expectations for 2026. The dollar is seen to be weaker, stocks are expected to continue to climb and the Fed is largely forecast to lower interest rates.

But analysts at Nordea believe the Fed might actually hold off from further rate cuts through 2026 as the labour market continues to hold up.

There were worries at the back end of last year that the jobs market was starting to sputter, as the unemployment rate rose to 4.6%. But that reversed in December, last week's payrolls figures showed, and other indicators, such as the ISM services survey, have shown an improvement.

"The latest signals from the labour market is painting a slightly different picture and also makes us slightly more confident in our view that we are not in for massive weakness ahead," Nordea analysts say in a note.

"...we struggle to see the case for the weakness in the labour market needed to justify a series of rate cuts," they added.

The bank forecasts that the Fed doesn't cut rates at all this year. In contrast, markets are almost fully pricing in two quarter-point moves, while the Fed's dot plot in December indicated one rate cut in 2026.

Nordea says the threat to the Fed's independence is the biggest risk to their view, although they noted that it is still uncertain what the impact could be.

"The investigation of Fed does not make this any less likely. It is however still very unclear how it will play out," Nordea says.

"A new dovish chairman will not be enough in itself and we could also see other members of FOMC becoming even more hawkish to avoid being seen as influenced."

(Samuel Indyk)

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