Economists at Bank of America expect the Federal Reserve to keep its policy rate unchanged in July while indicating that progress has resumed in reducing inflation. The bank's economists said in a note that the Fed is optimistic about the possibility of a near-term rate cut, but is unlikely to signal that a September rate cut is a done deal. They noted: "(September rate cut) is possible, but it depends on the data. This is the general tone of most FOMC members who have spoken publicly recently. While inflation data is encouraging, more evidence is needed before starting to normalize the policy rate." Bank of America also believes that Fed Chairman Powell will indicate that the Fed's focus will shift from a pure focus on inflation to a more balanced approach. Previously, the Fed put inflation first because inflation was far from its target and employment was closer to its target. "Now, with both inflation and employment deviations from their targets smaller, the Fed's attention can be more balanced. Rate cuts can be due to a cooling economy, slowing inflation, or both," the bank said. Although the market expects the Fed to start cutting rates in September and cut rates about 2.5 times this year, the Fed may not need to strongly support a September rate cut. The more interesting question is whether it will go against market expectations, Bank of America economists said.
"Even if the market rebounds somewhat on expectations of a rate cut, we think it will be modest. After all, Powell has said the committee will remain data dependent and will make decisions on a meeting-by-meeting basis," they wrote. Economists noted that Powell will have another chance to validate or refute market pricing at the Jackson Hole Symposium in late August. Overall, Bank of America still believes the Fed will cut rates once this December, while not being too concerned about the risk of a sharp economic slowdown. "We think the market is again starting to get too optimistic about the upcoming rate cut cycle," the economists said. However, they also acknowledged that a September rate cut is now closer to their baseline expectations. "A dovish Fed, a weak July jobs report, or a reappearance of inflation data similar to June could change our thinking," they said. On the other hand, a strong July jobs report and uneven inflation data, combined with above-consensus second-quarter GDP data, could lead the Fed to delay a rate cut until after September." Oppenheimer Asset Management also does not expect the Fed to cut rates before September. John Stoltzfus, director and chief investment strategist at the firm, believes this is an uncertain time because many highly leveraged investors want rate cuts, but the Fed has not yet decided to cut rates.
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