Bank of America expects the Federal Reserve to leave interest rates unchanged at its July meeting and says a hike would break with decades of precedent. The bank points to the record of Fed tightening, where hikes have not arrived as hawkish surprises, and to oil prices as the main risk to that call. It stays bullish on the dollar.
Bank of America expects the Fed to hold interest rates at its July meeting, and warned in a note on Tuesday that a surprise hike would break with decades of precedent. Markets have priced roughly 10 basis points of tightening, reflecting uncertainty and the risk of a hawkish surprise.
History gives no template for a July hike
According to BofA's note to investors: "History says Fed does not surprise hawkish with hikes." Drawing on federal funds futures data since 1994, the firm said the Fed has never hiked with less than 60% priced in beforehand. Analyst Mark Cabana told investors the base case is a hold with two hike dissents, from Logan and Hammack, though he said a move higher cannot be ruled out.
Oil keeps the hold call close
But BofA noted the July hold call is closer than it had expected following soft June inflation, with higher oil prices raising the odds of a hike. Recent U.S.-Iran de-escalation may modestly reduce that pressure, the firm said. It added that upside in oil remains an inflation risk.
What a hike would pull forward
Such a move would be unprecedented and would pull forward 2026 hikes from about 45 basis points to roughly 60 basis points, BofA said. The bank added that it would establish Warsh credibility on independence and inflation.
Cabana also set out what a hike would mean for long-end rates: the answer depends on risk assets and growth, he said, with lower risk assets likely to bring weaker growth expectations and a twist flattening of the Treasury curve. Meanwhile, the bank remains paid on the 2-year U.S. Treasury, positioned in 2s10s flatteners and bullish on the dollar.
Source: Investing.com
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