LIVE MARKETS-Fed rate cut and hike are equally unlikely - BNP
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FED RATE CUT AND HIKE ARE EQUALLY UNLIKELY - BNP
After the U.S. Federal Reserve surprised nobody by keeping interest rates steady on Wednesday, BNP Paribas economists looked ahead and in research note led by its chief U.S. economist James Egelhof, they forecast that the central bank will keep sitting on its hands for the rest of this year with regards to interest rates.
At its April meeting, Egelhof wrote that he expects the Fed to show a "symmetric policy bias - indicating that a rate hike or a cut is equally likely to come," assuming that energy prices stay elevated and U.S. unemployment is broadly stable.
The economist expects rates to stay steady throughout 2026 as Fed Chair Jerome Powell said that further rate cuts would depend on what happens with inflation. So, with the inflation conditions for a cut unlikely to be met this year, Egelhof sees "the burden of proof for hiking as similarly high."
"While it maintained an easing bias and projections for some additional policy easing, these were caveated heavily with uncertainty about the Iran war, both prominently in the meeting statement and repeatedly in the press conference" with Powell, the economist wrote.
"Powell imposed very restrictive conditionality for further rate cuts – namely that the US economy would see “progress on inflation” – which appears difficult to achieve even absent the war, and even more unlikely should high energy prices persist," he added.
And while the Fed Chair sounded comfortable about labor market stability, despite recent weakness, Egelhof noted that the central bank revised growth forecasts higher based on a "stronger productivity assumption related in part to AI."
He also noted that Powell had implied that rate hikes are a "plausible tail risk" if elevated inflation is entrenched as he mentioned that the U.S. is entering a sixth straight year of above-target inflation. He also read in Powell's comments an uncertainty that tariff and energy inflation were “one-time" issues and noted that he had declined to endorse a “look-through” approach to energy price inflation.
Egelhof sees the alternative to a “look-through” strategy as a tighter monetary policy.
With this, they argue that the Fed has "already adopted in substance a symmetric policy outlook, with two conditions: that the war will leave a lasting imprint on energy prices, and that the US labor market will prove as resilient to this as it did to earlier negative policy shocks."
Of course, BNP is not alone in its expectation for steady rates.
Traders are now betting on a 72% probability that rates will remain unchanged in December compared with 47% on Wednesday and a week ago, according to CME Group's FedWatch tool. Look at how much has changed in a month. On February 19 - before the U.S. and Israel started their war against Iran on Feb 28 - traders were betting on a measly 5.3% chance that we'd end 2026 right where we are, in the 3.5%-3.75% range, according to CME.
(Sinéad Carew)
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