An interest rate cut by the Federal Reserve is "not a consideration at this time" based on the latest comments from policymakers and minutes from the central bank's latest meeting, analysts at Bank of America Global Research wrote on Friday.
Statements from Fed policymakers this week suggested that policymakers would like to see more evidence that inflation is falling back to their 2% target, which means they are in no rush to lower borrowing costs.
Minutes from the May meeting of the rate-setting Federal Open Market Committee (FOMC) also show that members of the Fed remain concerned about continued inflationary pressures, with some members even expressing a "readiness to tighten policy further" if the risk of a price hike emerges.
However, Bank of America analysts said in a note to clients that "inflation data will need to decline significantly before the Fed seriously considers raising rates again."
"In recent weeks, FOMC participants have almost uniformly reiterated Fed Chairman Jerome Powell's stance that the current policy stance is tight, and that this should ease inflation down to 2% 'over time'. The implication is that the Fed sees no need to tighten further at this time.”
Meanwhile, this week's data showing stronger-than-expected business activity and a drop in weekly jobless benefit claims also dented hopes for an upcoming interest rate cut. In theory, a reduction in activity and a slower labor market could help moderate inflation.
For now, the market also does not expect that the Fed will begin to signal an upcoming rate cut. There is about a 45% chance the first tapering may not take place until September, according to CME Group's widely monitored FedWatch Tool.
In Bank of America analysts' base case, the central bank won't start cutting rates until December. They argue that the Fed may need to see a continued decline in service prices.
