The Federal Reserve is expected to hold interest rates steady at 5.25% to 5.5% following its December meeting, with Bank of America analysts seeing the central bank’s hiking cycle as over.
The analysts believe the bulk of economic data released since the Fed’s last meeting in November has pointed to a moderation in economic activity, disinflation and a cooling labor market.
On Tuesday, the latest consumer price index (CPI) data from the Bureau of Labor Statistics showed that headline inflation eased to 3.1% in November from 3.2% in October.
The December University of Michigan Survey of Consumer Sentiment also demonstrated sizeable declines in one-year-ahead and five- to 10-year-ahead inflation expectations, the BoA analysts pointed out.
“We think that this has increased the Fed's confidence that its current policy stance is appropriate and sufficiently restrictive,” they wrote in a note to clients.
“If so, upcoming Fed decisions will likely be more about how long to maintain its current policy stance than whether additional policy rate firming is needed.”
They believe that Fed chair Jerome Powell’s statement will include more balanced language, stating “the Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time."
“Elsewhere, we think that the statement will take onboard the signal from incoming data, which points to slower growth in the current quarter versus rapid growth in the third quarter,” they wrote.
Powell will announce the Fed’s rate decision in a press conference at 2pm ET on Wednesday.