Synopsis:

Bank of America provides an analysis of the Federal Reserve's recent FOMC meeting, highlighting a continued cautious approach with a shift to a wait-and-see policy stance. The Fed's deliberation on inflation and market dynamics suggests a possible rate cut in December, reflecting prolonged uncertainty in economic recovery.

Key Points:

• Wait-and-See Policy Stance: In response to unexpected inflation data, the Fed has adopted a wait-and-see approach, indicating a readiness to maintain current interest rates for an extended period. Chair Powell emphasized the need for more conclusive data to achieve the desired confidence level before implementing rate cuts.

• Balance Sheet Policy Adjustments: The Fed set a new cap of $25 billion for Treasury securities runoff, slightly below BofA's anticipated $30 billion, suggesting a slightly slower pace of balance sheet reduction. This decision aims to mitigate potential disruptions in funding markets and extend the runoff duration.

• Inflation Outlook: BofA maintains its forecast for a rate cut in December, predicated on the expectation that inflation will decline more slowly and remain more persistent than initially projected. The high threshold for further rate hikes was supported by Powell’s remarks.

• Market Reaction: The rates market perceived the Fed's communications as dovish, with minimal initial reaction to the statement but a more pronounced response during Powell's press conference. This resulted in lower rate expectations and spurred a dip-buying behavior in the market.

• USD Performance: The DXY experienced a slight decline, with the market's dovish interpretation leading to a moderate underperformance of the USD against higher-beta currencies. This aligns with equity rallies and a modest drop in U.S. yields. BofA expects the USD to depreciate later in the year, contingent on clearer signals of impending rate cuts.

Conclusion:

The Federal Reserve's latest deliberations underscore a strategic caution in monetary policy, with an emphasis on monitoring economic indicators closely before making further adjustments. BofA anticipates a potential rate cut by the end of the year, depending on the trajectory of inflation and economic recovery.