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Apr 02 - 09:55 AM

BofA: When in Doubt, Follow the Fed Leader

By eFXdata  —  Apr 02 - 09:18 AM

Synopsis:

Bank of America analyzes recent comments made by Fed Chair Powell, interpreting them as overall dovish, emphasizing the likelihood of a rate cut in June. Powell indicated a preference for cutting rates in response to economic weakness while maintaining current rates if the economy remains strong, unless inflation increases significantly.

Key Points:

  • Powell's Remarks: His comments last Friday are seen as neutral but lean towards a dovish policy outlook. The focus is on determining the timing of rate cuts rather than contemplating hikes, reflecting an asymmetric reaction function to economic data.

  • Supply and Demand Inflation Dynamics: BofA's analysis divides core PCE inflation into supply and demand components. Year-over-year, demand-driven inflation remains stable, aligning with Powell's perspective, while supply factors show marked improvement. However, on a six-month basis, demand-driven inflation has shown acceleration, aligning more with the concerns of some Fed officials like Waller.

  • Policy Outlook: BofA maintains its forecast for three Fed rate cuts this year, beginning in June. The decision remains finely balanced, with upcoming core PCE readings crucial in determining the timing and necessity of rate adjustments.

Conclusion:

Chair Powell's recent dovish comments, as interpreted by Bank of America, suggest a leaning towards monetary easing, with a rate cut in June becoming more probable. While the Fed's reaction to economic data appears skewed towards addressing weaknesses rather than strengths, upcoming inflation data will play a critical role in finalizing the decision. BofA advises that significant increases in upcoming core PCE inflation readings could potentially delay the anticipated rate cuts, especially if economic activity remains robust.

Source:
BofA Global Research

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