Multiple Fed hikes might be in the picture – BAML

FXStreet (Barcelona) - According to BofA-Merrill Lynch, Fed might hike rates by 25bp in September, and follow with similar hikes at its other meetings, in spite of inflation remaining below the Fed’s target.

Key Quotes

“Our Economist Ethan Harris and his team expect the Fed to hike by 25bp in September, followed by 25bp hikes at every other meeting, even as inflation remains below the Fed’s 2% target for a time.”

“After all, the FOMC statement indicates that the Fed will “take a balanced approach in promoting” its dual mandate objectives, which gives scope for continued labor-market healing to balance out negative surprises on the inflation front, up to a point.”

“For their part, Fed officials expect a further reduction in labor-market slack and stable inflation expectations (survey measures, in particular) to pull inflation back toward 2% over time. Markets are not convinced, judging by the drop in 5y5y TIPS breakevens to 1.75%.”

“The Fed’s base case hinges on their forecast for continued above-trend growth, which they expect to foster a further decline in the unemployment rate.”

“As rates have priced in a lower medium-term path, Fed officials’ confidence in their growth forecast has increased. Their assessment of forecast uncertainty has declined to the lowest levels since the recovery began, which supports the case for liftoff in 2015.”