Markets are currently pricing in a pause in Federal Reserve interest rate hikes next month. A decision that will come before the central bank plans to cut rates twice before the end of 2023, according to market prices.
But a new report from rate strategists at Bank of America Global Research released Thursday suggested that this pricing means one of two things: Either the Fed’s rate hikes aren’t over yet, or the cuts will be deeper. than expected by the markets.
“Historically, the market has tended to underestimate actual Fed policy before hikes and cuts cycles: the market often values too few rate cuts before a cut cycle and too few hikes before a cut cycle. rise,” wrote the BofA strategists led by Meghan Swiber. in a note to customers on Thursday.
Many economists took Fed Chairman Jay Powell’s press conference on May 3 as indicating a “warmongering pauseor a tendency to hold rate hikes on hold while being closer to more rate hikes than rate cuts.
“Going forward, we will take a data-driven approach to determining the extent to which further policy strengthening might be appropriate,” Powell said in prepared remarks at his press conference. Powell added in response to a question about the Fed’s next move: “A decision on a pause was not made today.”
Economic data has largely deteriorated in favor of the Fed since then. Inflation rose to its slowest annual rate in two years in April and the the latest jobs report showed evidence of a sufficiently large cooling in the labor market for the Fed to suspend future rate hikes, according to some economists.
After the release of inflation data on May 10, the markets were valuing a greater than 95% chance that the Fed will pause in June, according to CME data.
But those projections have slowly slowed as some members of the Federal Open Market Committee — which votes on Fed policy — offer their thoughts on the economy ahead of the Fed’s next policy announcement on June 14.
On Thursday, Dallas Fed Chair Lorie Logan, a voting member of the FOMC, question the suspension of the Fed most aggressive rate hike campaign in four decades.
“After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made progress,” Logan said. said an audience in San Antonio. “Data in the coming weeks may still show that skipping a meeting is appropriate. As of today, however, we are not there yet.”
Investors will listen carefully to Powell’s comments on Friday when he speaks with former Fed Chairman Ben Bernanke at an event in Washington, D.C.
CME data as of Thursday show the odds of a rate hike next month rose from 28% to 36% following Logan’s comments. However, stocks looked largely indifferent as the tech-heavy Nasdaq rallied more than 1% on Thursday.
“These odds haven’t been accurate throughout this cycle,” Brian Levitt, Invesco’s global market strategist, told Yahoo Finance Live on Thursday. “So it is possible that we will see another rate hike.”
Whether the Fed chooses to raise or lower rates in the coming months, Bank of America simply notes that the magnitude of this decision is likely to surprise markets.
“If the Fed begins a cycle of cuts later next year, as our economists expect, the Fed could make more cuts than currently expected a year ahead,” the firm wrote.
Josh is a reporter for Yahoo Finance.
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