Danske Bank Delays Fed Rate Cut Expectation to 2025 Amid Economic Stability

Danske Bank has adjusted its expectations for the Federal Reserve's rate cuts, pushing back the anticipated timing of the next reduction. Initially, the bank had predicted the next rate cut to occur in June, with a total of three cuts expected throughout 2025. However, recent economic developments have led Danske Bank to revise its outlook. The bank now expects the Fed to maintain its current monetary policy stance for a longer period before implementing any rate cuts. This shift in expectation comes amidst a backdrop of rising Treasury yields and a focus on economic indicators such as the tax bill and potential US downgrade.

The bank's revised forecast aligns with broader market sentiments that have seen a repricing of risk and a lowering of recession odds. According to the analyst's forecast, the probability of a recession has been reduced to 35%, and the peak forecast for the core Personal Consumption Expenditures (PCE) index has been trimmed to 3.6%. These adjustments suggest a more stable economic environment, which could influence the Fed's decision-making process regarding interest rates. The bank's updated outlook opens the door for three additional rate cuts in 2025, although the exact timing remains uncertain.

Danske Bank's decision to delay its rate cut expectation reflects a cautious approach to monetary policy, taking into account various economic factors and market conditions. The bank's analysts have been closely monitoring the economic landscape, including the potential impact of the tax bill and any changes in the US credit rating. These considerations are crucial in shaping the bank's expectations for future rate cuts and their potential impact on the broader economy.

With the Fed starting to cut rates every quarter, the terminal rate is now expected to be reached by September 2026. A loose financial environment, lower tariffs, and macroeconomic data in April that exceeded expectations have reduced the immediate need for a rate cut. However, in the long run, the slowdown in structural growth and sluggish credit expansion still indicate further rate cuts in the future. Danske Bank maintains its forecast for the terminal interest rate at 3.00%-3.25%.