Bank of America has announced in its latest report that the Federal Reserve is likely to raise interest rates two more times in December 2026 and March 2027. This change in forecast follows the recent Federal Reserve meeting in October and the maintenance of the current interest rate.
Market Conditions and Federal Reserve Policies Analysis
According to Bank of America, the Federal Reserve's statement indicates that the institution intends to proceed cautiously and may act at a seasonal pace, as it is still uncertain about how restrictive current policies are. Bank of America has maintained its forecast for the terminal rate in the range of 4.25% to 4.5% and expects this rate to remain at this level until the end of 2027.
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In a press conference, Federal Reserve Chair Kevin Warsh referred to tighter financial conditions as a sign of the positive effects of rate increases in September. He did not make any statements regarding the possibility of rate increases in December, which has been assessed as a cautious approach.
Impacts on Financial Markets and Currency
Bank of America further added that this approach could increase the risk of Warsh's credibility being challenged by the markets. Following this meeting, the U.S. Treasury curve tilted towards a steeper slope, with two-year yields decreasing by 6 basis points during the press conference, while 30-year yields increased by 4 basis points.
Bank of America analyzed that these changes reflect a lack of market confidence in Warsh's credibility in dealing with inflation. Additionally, the bank still believes that higher rates in the short term and a flatter curve over time will continue. However, it is expected that rising long-term rates will increase the risk of reduced Treasury supply in future dates.
Ultimately, the dollar decreased by approximately 0.2% to 0.3% during this meeting. Bank of America stated that a slower initial path in rate increases may mean the need to maintain rates at higher levels for a longer period, which could ultimately support the dollar over time.
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