Why BofA says July Fed rate hike would be "unprecedented"

Investing.com -- Bank of America expects the Federal Reserve to hold interest rates at its July meeting, and warned in a note on Tuesday that a surprise hike would break with decades of precedent.

Analyst Mark Cabana told investors that the base case is a hold with two hike dissents, from Logan and Hammack, though a move higher "can't be ruled out."

Markets have priced roughly 10 basis points of tightening, reflecting uncertainty and the risk of a hawkish surprise.

BofA noted that the July hold call is closer than it had expected following soft June inflation, with higher oil prices raising the odds of a hike. Recent U.S.-Iran de-escalation may modestly reduce that pressure, though the firm said upside in oil "remains inflation risk."

Central to BofA's view is the argument that "History says Fed does not surprise hawkish with hikes." According to federal funds futures data since 1994, the firm said, the Fed has never hiked with less than 60% priced in beforehand.

A move this week would be "unprecedented," pull forward 2026 hikes from about 45 basis points to roughly 60 basis points, and "establish Warsh credibility on independence & inflation," BofA said.

The bank said it remains paid on the 2-year U.S. Treasury, positioned in 2s10s flatteners and bullish on the dollar.

“Clients ask: if Fed hikes in July, will long-end rates go higher or lower? Our A: it depends on risk assets & growth. Lower risk assets are likely to see weaker growth expectations & twist flattening of UST curve,” concluded Cabana.

You May Also Be Interested In

• Fed Holds Rates at 3.50% to 3.75%
• L’Oréal posts 6.8% H1 sales growth, record margins
• Warsh: There Is No Soft Inflation Target