Earnings Call
Signals & Noise: July FOMC meeting: oil or nothing
- The market currently prices a 35% to 40% probability of a rate hike at the July meeting, implying roughly nine basis points, though Bank of America's baseline view anticipates a hold with two potential dissents for hikes from regional presidents Logan and Hammock.
- While the research team does not rule out a hike due to five years of missed inflation targets and a projected six to seven-year return to target, the Fed Chair intends for market pricing to inform policy rather than receiving explicit guidance from the central bank.
- Factors driving potential action include resilient U.S. economic data across growth, consumer spending, and labor markets, easy financial conditions, geopolitical risks to oil prices, and shifting Fed rhetoric toward inflation impatience.
- Historical analysis of Fed Funds Futures and OIS pricing suggests a hike would be unusual, as markets typically price in a minimum 60% probability of action, often exceeding 90%.
- A hike this week is projected to trigger a pull-forward in timing and an increase in total cycle hikes, shifting expected moves from roughly 55 basis points to 70 basis points, with end-of-2026 pricing moving from 45 basis points to 60 or more basis points.
- Market reaction to a hike is expected to see long-end rates and 10-year breakeven inflation rates decline to 2.2% or lower as higher rates create economic headwinds and reduce inflation risk premiums, despite short-term volatility in risk assets.
- The 10-year and 30-year yield forecasts for the end of 2026 are 4.5% and 5% respectively, approximately 15 basis points below current levels, with a surprise hike flattening the curve and moving rates closer to these long-term targets.
- If the Fed proceeds with a hike given the low pricing, it would establish a new historical precedent.