Goldman Sachs, BofA see ‘close call’ on June Fed, but market now sees 70% upside odds

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Higher interest rates are not yet hitting the consumer hard or bringing inflation back to target, according to today’s April PCE report. Inflation rose 4.4% year-on-year from 4.2% previously, while personal spending jumped 0.8% in the month.

Bank of America reaffirmed its basic assumption that the Federal Reserve will not implement a rate hike in June, although the bank maintains an upward trend going forward, noting that this is a “near call”. According to BofA, three conditions must be met for a Fed rate hike: 1) strong economic data, 2) an increase in the debt ceiling, and 3) moderate regional bank stress.

The bank also believes that inflation remains too persistent for the Fed to commit to an extended pause in rate hikes. Even if the Fed decides to forgo a rate hike in June, BofA is hinting that it will keep the possibility of a July hike on the table.

Separately, Goldman Sachs economists continue to pursue them. After calling for a break after the March banking stress and seeing an upside anyway, they are now reeling with their June call.

“While we continue to expect the Fed to suspend suppression in June, stronger than expected consumer spending and inflation data from this morning and the wide range of FOMC participants’ views on the appropriate political avenue make it a close call,” Goldman Sachs economists wrote today.

The market is looking for a 70% chance of a rise in June and a 100% chance of a rise in June or July.


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