Bank of America economist Aditya Bhave wrote in a note on Friday that markets have "nearly priced out Fed cuts for the year," and that clients are increasingly pressing for clarity on what might lead the Federal Reserve to raise rates instead.
In that note, BofA lays out "at least three conditions for the Fed to hike: a stable labor market (u-rate <4.5%), further increases in core inflation (core PCE >3.2%) and Powell as Chair." The firm links the likelihood of those conditions materializing to the trajectory of oil market disruption tied to Iran.
Specifically, BofA argues the trio of prerequisites is most likely to be met if the Iran-related oil shock is "sustained but moderate." The bank says the policy "sweet spot" for potential hikes would be if WTI remains in the $80-100 range.
Bhave flagged Iran as an upside risk to the inflation outlook and warned that "PCE inflation remains stubbornly high," a combination that would make it difficult for the Fed to justify cutting rates in the near term.
On the tone of policy discussions, BofA noted that Chair Jerome Powell's March press conference carried a "hawkish read." The bank says Powell placed significant emphasis on "the inflation overshoot and upside risks to inflation expectations," while he devoted less attention to potential downside risks in the labor market. Powell also highlighted "a high degree of uncertainty around the Iran war."
The note sketches a relatively light economic calendar for the coming week. BofA lists the following scheduled releases: construction spending on Monday; the S&P manufacturing and services PMIs on Tuesday; import price indices on Wednesday; initial jobless claims on Thursday; and the final March University of Michigan consumer sentiment print on Friday.
Bhave and his team expect the final March UMich reading to be soft, reasoning it will capture more of the Iran war impact than the preliminary print did. Taken together, BofA emphasizes that the persistence of inflation alongside geopolitical risks will create a "hard time arguing that the inflation data justify near-term rate cuts."
Context for market participants
The bank's framework ties policy risk to both economic readings and geopolitical-driven commodity prices. If the Iran-related oil shock keeps a moderate and sustained premium on crude - with WTI in the $80-100 band - that alters the inflation calculus and raises the bar for any easing in monetary policy.