The swedish riksbanken, the Federal Reserve and the rates market in 2026

We spoke with Lars Kristian Feste, Head of Fixed Income at Lannebo, to discuss the current environment and the issues that may prove decisive for investors.

After three years marked by inflation peaks, aggressive rate hikes and subsequently gradual easing, 2026 begins with key monetary policy decisions from the world’s largest central banks. The Riksbank kept its policy rate at 1.75 percent and reiterated its guidance that rates are likely to remain unchanged for an extended period. The Federal Reserve took a similar stance, describing the US economy as stable, with inflation moving towards, but not yet reaching, target.

This creates a market backdrop in which policy rates are on hold, while uncertainty continues to shift beneath the surface.

The Riksbank’s Position

Feste begins with the Swedish outlook.

“The Riksbank’s decision to keep the policy rate unchanged is logical given current conditions. The Swedish economy is developing well, with growth improving and unemployment declining. At the same time, wage negotiations have been moderate. The social partners deserve considerable credit, as their approach has been an important factor behind inflation returning to acceptable levels.”

He notes that the Riksbank is communicating in line with the information currently available.

“The central bank does not possess privileged foresight. It signals that the policy rate is likely to remain unchanged for some time, which is a reasonable assessment. However, several factors could alter the outlook. The temporary reduction in food VAT is unlikely to be reversed according to the original schedule, and wage increases remain moderate. Inflation could therefore stay close to one percent for a prolonged period. In such a scenario, it would become difficult for the Riksbank to avoid rate cuts.”

He also highlights the Swedish krona as an important variable.

“The krona has appreciated significantly more than the Riksbank’s forecast suggested. That is a wildcard in the rate setting process. A stronger currency dampens inflation further and affects the central bank’s room for manoeuvre.”

The Resilience of the Swedish Economy

Feste argues that Sweden has demonstrated notable resilience.

“We have seen a clear improvement in output and the labour market towards the end of last year. Consumer confidence remains fragile, but the direction of travel is positive. The main risks stem from geopolitics and how the export sector is affected by developments in Europe and the United States. Fundamentally, however, Sweden stands on solid ground, supported by responsible wage formation and a fiscal policy that has not become excessively expansionary.”

The Federal Reserve and the US Outlook

Turning to the United States, the analysis becomes more data driven.

“In the US, the labour market is always the key variable. Unemployment has edged higher, but without clear signs of recession. An important factor is that labour supply has declined as immigration has slowed and some participants have exited the workforce. Meanwhile, the US economy has shown surprising resilience despite tariffs and geopolitical tensions.”

He stresses that the Federal Reserve is also operating without perfect foresight.

“At present, a policy rate of 3.75 percent appears to balance inflation and labour market conditions reasonably well. The market expects two rate cuts in 2026, but the Fed does not appear to be in a hurry.”

He also observes that markets have become more selective in their response to geopolitical events.

“Following the so called Liberation Day, equity markets fell by 15 percent and bond markets were extremely volatile. Later geopolitical statements had a far more muted impact. Investors today seem more discerning in how they price geopolitical risks.”

Currency Flows Over Theory

When discussing the Swedish krona, Feste emphasises capital flows over textbook models.

“In practice, currencies are driven more by capital flows than by interest rate parity in the short term. The weakness of the Swedish krona in recent years largely reflects capital flowing into US equity markets. That dynamic now appears to be reversing. As investors reallocate away from the United States, part of that capital may return to Sweden, strengthening the currency even if underlying fundamentals have not materially changed.”

The Yield Curve and Forward Returns

The yield curve has also normalised.

“For a prolonged period, the curve was inverted, historically a recession signal. That did not materialise this time. The curve has normalised as the Riksbank lowered rates. We view current levels as broadly fair.”

He believes the source of fixed income returns is shifting.

“In recent years, returns have primarily come from compression of credit risk premia. Going forward, we expect returns to be driven more by carry, by the coupon. Higher coupons typically imply higher risk, which makes credit selection increasingly important.”

How Should Investors Position?

Summarising the investment environment, Feste highlights three key questions.

“The most important considerations are whether the borrower can repay, whether the borrower is willing to repay, and whether investors are adequately compensated for the risk. For those with time horizon and tolerance for some volatility, credit funds remain attractive. For investors seeking lower volatility, short duration funds offer greater stability, albeit at the cost of lower expected returns.”

A Stable Year, But Not a Quiet One

Looking ahead, his base case is stability rather than dramatic change.

“As it stands, 2026 is likely to be a stable year without major shifts from central banks. Risks always remain, particularly in a geopolitical environment that is difficult to model. Nevertheless, Swedish, European and US economies should continue to develop constructively. T