When Politics Meets Monetary Policy

For the month as a whole, the American S&P 500 rose 3.64 percent measured in USD, the European Stoxx 600 ended up 1.54 percent measured in EUR, and the Nordic VINX fell 0.10 percent measured in NOK. Here at home, the Oslo Stock Exchange fell 0.12 percent (OSEBX).

Rate Cuts and Rising Uncertainty in the US

The US central bank (FED) cut interest rates for the first time since last December. The market now expects another four cuts over the next twelve months, driven by signs of a weaker labor market. Although growth expectations were revised upwards, rising unemployment and lower employment growth point to a more fragile labor market. FED therefore faces a challenging balancing act between supporting growth and avoiding the risk of persistent inflation. At the same time, inflation forecasts for 2026 show a slight upward revision, suggesting that price pressures are not yet over. The new board member Stephen Miran caused a stir by calling for a double rate cut, reinforcing the impression of internal disagreement within the central bank.

The Central Bank’s Independence Challenged

The debate over the FED’s independence has gained new relevance. Criticism from Donald Trump and his attempts to influence monetary policy have drawn attention to the relationship between politics and the central bank. Several economists are now expressing concern that pressure on the FED could undermine trust in the institution. That Trump recently removed the head of the Bureau of Labor Statistics after weak labor market data has not helped calm the situation. Although this is primarily a tail risk for now, continued political interference could create uncertainty about the direction and credibility of monetary policy. Confidence in the central bank’s independence will therefore be crucial to maintaining stability in the financial markets.

Political Stalemate and “Shutdown”

At the turn of the month, parts of the US government were shut down after a failure to pass a budget. Such a “shutdown” initially affects non-essential services, but it also delays the release of important macroeconomic data such as labor market statistics. While the economic impact is likely to be temporary, the event adds to uncertainty and short-term volatility. This is the first shutdown in six years, and the previous one lasted more than a month. Past government shutdowns in the US have not made the stock market particularly worried.

The Road Ahead

Market sentiment remains constructive, with broad gains across both developed and emerging economies. The Fed’s rate cut has boosted risk appetite but also raised questions about the long-term sustainability of monetary policy. Meanwhile, geopolitical tensions and increased political noise in the US are keeping nerves high. In the Nordics, central banks have surprised with new cuts but are now signaling a more cautious stance. Continued strong corporate earnings and inflation-hedging qualities make equities remain an attractive asset class.