BofA expects Fed to pause in June as inflation, labor market show signs of cooling

BofA analysts see “good reasons” for the U.S. Federal Reserve to pause in June and “little reason” to cut rates.

The analysts are comfortable with their forecast that the at the upcoming meeting in June. BofA’s base-case scenario also sees the Fed staying on hold until it starts to cut rates early next year.

On the other hand, markets continue to expect a more dovish Fed as they are pricing in 3 25-bps rate cuts for 2023 and in total 160-bps cuts until the end of 2024.

“We think the risk to the policy path is still to the upside in the near term. Put simply, inflation is more than double the Fed’s target rate and the unemployment rate is below every FOMC participant’s estimate of the natural rate,” the analysts said in a client note.

“These facts alone suggest that the Fed’s bias would be to hike rather than cut. Things could change quickly if there is a major recession, but the recent data flow favors a more benign slowdown. In our view, rather than lean against a mild recession, the Fed would view it as an acceptable price for bringing inflation back down to target.”

On the data front, the analysts highlighted that the recent releases show that the labor market is going “from red hot to hot” while inflation also continues to cool.

“While there are reasons to be encouraged, inflation is only declining gradually. Moreover, we continue to expect that a rebalancing of the labor market will be needed to restore inflation to the Fed’s two percent target on a persistent basis. Therefore, it is no time to take a victory lap,” the analysts concluded.