MARKET OUTLOOK - If the Trump Administration Increases Fiscal Spending, the Point at Which Fed Rate Cuts Halt Will Rise

SEB Research's Jussi Hiljanen argued that the new U.S. government's increased fiscal spending is expected to lead to a higher terminal fed funds rate than previously seen. SEB Research now expects the terminal fed interest rate target—where interest rate cuts stop—to be between 3.25% and 3.50%, though there are upward risks. This represents a 50 basis point increase compared to previous estimates.

Hiljanen stated, "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, irrespective of the U.S. election outcomes. However, the election result is likely to mean even greater rises in U.S. yields over the next 1-2 years. According to Hiljanen, this is due to the Fed's cautious approach to interest rate cuts, factoring in higher inflation and a larger budget deficit than previously anticipated.

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