Fed may pause monetary tightening in September, according to BofA

The Federal Reserve may take a break from tightening monetary conditions in September if the economic outlook deteriorates and inflation declines, Bank of America strategists said in a note on Thursday, a day after the release of the latest minutes. US central bank meeting.

Monetary policymakers agreed to raise interest rates by 0.50 percentage point at the May 3-4 Fed meeting to combat high inflation, and most participants at the meeting said further increases of this magnitude in June and July may be appropriate.

The central bank will likely pause its upward trajectory in September, leaving the one-day policy rate in a range between 1.75% and 2% if financial conditions worsen, strategists at BofA said in a note.

“We have recently seen a tenuous but notable shift in communications from the Fed, where some officials suggest the option of tapering or pausing later in the year as they reach the 2% rate given the challenging macroeconomic backdrop, the tightening of financial conditions and the possible reduction of inflation”, they said.

Fed funds futures traders on Thursday were pricing in increases of 0.50 percentage point for each of the Fed’s June and July meetings and another 0.25 percentage point in September.

While this is not its base case, BofA said the central bank could see the 1.75% to 2% base rate providing “a normalization of monetary policy that provides an opportunity to pause and assess the impact on jobs and inflation.” ”.

Other analysts, however, do not see the Fed as having shifted to a more flexible stance on inflation.

Strategists at TD Securities said they expect the central bank to raise rates above the neutral rate, a level that neither stimulates nor constrains economic growth, but at a more gradual pace after the June and July meetings. Fed policymakers estimate the neutral rate to be roughly between 2% and 3%.