Source: Zhitong Finance

Bank of America American economist Michael Gapen said before the Federal Reserve announced the interest rate decision that the unexpected stubbornness of US inflation made the Fed not confident enough to consider cutting interest rates, causing interest rates to remain high for a longer period of time. In response to higher-than-expected inflation data, Bank of America drastically revised its forecast over the past month. After initially predicting that interest rates would be cut three times this year, the bank now expects the Federal Reserve to cut interest rates only once in December this year.

According to information, the Federal Reserve will announce the May interest rate decision at 2 a.m. Beijing time on Thursday, and Federal Reserve Chairman Powell will hold a press conference at 2:30 a.m. on the same day.

As the market generally expects the Federal Reserve to stay on hold this week, the focus is on the Fed's future policy actions, particularly possible interest rate cuts.

The market expects the Fed to cut interest rates moderately by 35 basis points in 2024 (equivalent to cutting interest rates once), while the CME Federal Reserve Watch Tool (FedWatch Tool) shows that the possibility of cutting interest rates by September is 60%.

Gapen adjusted the 2026 terminal interest rate forecast to between 3.5% and 3.75%. The economist said the shift highlights that the pace of counterinflation is slower than previously anticipated.

He said, “The main message we expect from the press conference is that policies need more time to take effect. Powell should indicate that the next step is still likely to be to cut interest rates, but the Federal Reserve will wait and see until it has confidence in inflation.”

“Although the Federal Reserve can regard recent strong inflation data as noise, it will take into account some signals and conclude that counterinflation is progressing at a slower pace,” Gapen said.

Looking ahead, Bank of America does not rule out the possibility that the Federal Reserve will raise interest rates again, but only if one of the following two situations occurs: the core inflation rate and overall inflation rate rise rapidly, or inflation expectations rise. Gapen said both of these situations indicate that the supply shock is over and that the economy may be overheating.

He said, “Whether the increase in labor temporarily boosts the potential growth rate, the Fed maintains a restrictive policy due to increased inflation, or a huge fiscal deficit driving economic expansion, we think the right answer is to cut interest rates less often.”

As far as the Federal Reserve's balance sheet is concerned, Bank of America expects the Federal Reserve to announce a reduction in balance sheet size at the May meeting. This would involve lowering the monthly redemption limit for maturing US Treasury bonds from $60 billion to $30 billion.

edit/lambor