Bank of America believes the Fed will first cut rates in December but conceded that much of what happens next could hinge on Thursday's inflation report. The market is pricing in 19 bps of easing through the Sept FOMC and 50.6 bps by year end.
For this report, BofA forecasts a modest increase in both headline and core CPI, which should be favorable for the Fed.
Key Points:
- Headline CPI: Expected to rise by 0.1% month-on-month (0.11% unrounded) due to another drop in energy prices, leading to a year-on-year rate of 3.2% and an NSA index of 314.770.
- Core CPI: Predicted to increase by 0.2% month-on-month (0.24% unrounded). Although slightly higher than May, it would still be a positive outcome for the Fed.
- Fed Rate Cuts: Should the CPI report align with these expectations, BofA maintains their forecast for the Fed to begin its rate-cutting cycle in December. However, a consistent 0.2% month-on-month increase in Core CPI could tilt the risk towards an earlier cut, especially with signs of softening economic activity.
Conclusion:
BofA expects the June CPI report to show modest increases in both headline and core CPI, reinforcing the positive trends from May. This should support the Fed's current policy trajectory, with potential for rate cuts starting in December, unless continued low Core CPI prints suggest an earlier intervention.
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