BofA Merrill Lynch sees case for summer rate hike by the Fed

The Federal Reserve is likely to hike rates again this summer, potentially in June if the global market selloff ahead of the Brexit vote is limited, otherwise in July, according to Bank of America Merrill Lynch.

Merrill noted markets are pricing nearly no chance of a hike over the next few meetings, and less than one full hike by the end of the year, with near-term weakness in US activity data and cautious comments from Fed Chair Janet Yellen reinforcing this view.

“Yet global economic and financial conditions have generally stabilised if not improved, and we expect further progress toward the Fed’s dual mandate objectives over the coming months.

“As a result, we think the Fed will likely hike rates again this summer,” it said.

Either way, it said the Fed will have to start preparing markets for a possible rate hike at an upcoming meeting this summer.

With no press conference or forecast update at the April Federal Open Market Committee meeting, the focus will be on the statement language.

“The FOMC will likely acknowledge the weak data to start the year, but contrast with expectations for continued gradual progress toward full employment and the inflation target. The Committee may note global risks have dissipated slightly, or that the disinflationary effects of the US dollar or commodity prices have started to ease.

“Some signal of this type could help to modestly lift the market’s assessment of rate hike likelihood. More explicit language or guidance would be more powerful, but also a low-probability outcome, in our view.”

Merrill reckons the market is assigning a 20% chance to a 25 basis points rate move in June, with probabilities likely to rise if the Fed softens concerns over risks from global and financial market developments or if they allude to a potential rate increase in the near term.

However, with continued uncertainty from abroad and the UK referendum taking place just a week after the June FOMC June FOMC, the bank is sceptical the market will price in elevated odds for a June hike unless the Fed materially shifts their communications or there is a clear improvement in the global outlook.