MARKET OUTLOOK - If Trump Administration Increases Fiscal Spending, Fed Rate Cut Threshold Rises

Forex - SEB Research's Jussi Hiljanen argued that the new U.S. government's increased fiscal spending is expected to lead to a higher final federal funds rate than previously seen. SEB Research now anticipates the target for the final federal funds rate - where interest rate cuts will cease - to be between 3.25% and 3.50%, but there are upward risks. This rate is 50 basis points higher than previously observed.

Hiljanen noted, "It is likely that the Fed will reduce policy rates less than previously anticipated." He also mentioned that SEB Research expects an increase in U.S. Treasury yields by 2025, regardless of the outcome of the U.S. elections. However, the election results imply that there will be even greater increases in U.S. yields over the next 1-2 years. According to Hiljanen, this is due to the Fed’s more cautious approach to interest rate cuts, taking into account the effects of higher inflation and a larger budget deficit than previously expected.

Hiljanen stated, "Larger budget deficits will particularly create more upward pressure on long-term yields."