Economists at Nordea believe the Fed should keep interest rates high for an extended period

The issue is updated.

With Federal Reserve Chairman Jerome Powell’s speech on Thursday, the “most important interest rate in the world” settled into view near five percent. On Thursday, the final rate ended at 4.99 percent. On Friday, the average interest rate was 4.94 percent.

The fact that investors can get a risk-free return of five percent over the next ten years is clearly evident in the stock market. On Friday, the major US central indices follow Thursday’s decline. They started with a slight decrease, then increased. Meanwhile, the Vix fear index is also rising.

With the release of reports issued by major banks in recent days, the US stock market has shaken off the first automatic quarter of the earnings season. But higher interest rates now appear to be overshadowing investors’ and managers’ interest in the current earnings season.

Because this is the interest rate everyone is talking about. Many are commenting that Powell left the door open for further rate hikes in Thursday’s session.

– Jerome Powell lays out all the possibilities for raising the new interest rate on November 1. But in order not to let the market go completely off course, he is still keeping the door open for further rate hikes, Peter Boockvar, who publishes the Book Report, told Bloomberg after Powell’s speech on Thursday.

The ten-year-old gets up – the two-year-old falls

While the 10-year note holds itself in the 4.9 range, the 2-year note shows that the interest rate market expects short-term interest rates to be somewhat lower. From its peak on Thursday, two hours before Powell delivered his speech, the two-year-old stock has now fallen by 20 basis points. The peak of 5.26 percent was the highest level since 2007. When US stock exchanges opened on Friday, the interest rate was 5.10 percent.

In a weekly summary, economists Erik Bros and Joachim Bernhardsen at Nordea write that the US government’s 10-year interest rate reached new levels this week, and that the rise since the beginning of September is “as much as 0.85 percentage points,” which are levels last seen in 2007:

– Strong key figures from the US economy contribute to the rise. On Thursday, Fed Chairman Powell emphasized in a speech that the latest data indicates progress toward the Fed’s goals of price stability and maximum employment. The central bank could proceed cautiously on interest rate increases, according to Powell, so the market still believes the peak in interest rates has likely been reached, economists at Nordea wrote.

According to a Bloomberg overview, there is now only a slight preponderance of economists believing in interest rate hikes at the Fed’s next three interest rate meetings. Already in March, there is clear support for interest rate cuts.

They point out that the US economy has handled interest rate increases better than feared:

However, it reinforces the belief that the Fed should keep interest rates high for an extended period to prevent further pressure on the economy. The ten-year interest rate is now higher than the two-year interest rate. This may be an expression of belief in a higher interest rate in the long term. Nordea’s economists wrote that the 10-year interest rate should reflect, among other things, expectations for the key interest rate over the next 10 years.

It puts the outcome of the season in the shade