In a notable call, Bank of America Merrill Lynch is now forecasting the first rate increase to occur in June 2015, and not September 2015 as earlier forecast. The rate call moves the bank closer in line with the Wall Street consensus for the first hike in the middle of next year.
The bank then expects rate hikes every other meeting for the first year and a half, and a peak funds rate of 4%.
What changed? The growth and inflation data have been stronger than the bank expected. Asset markets also have been helping growth, with lower-than-expected bond yields, gains in asset prices and a “re-engagement of the banking system.”
Finally, there’s been a gradual change in rhetoric from Federal Reserve Chairwoman Janet Yellen and colleagues.
As for next week, the bank sees the Federal Reserve modifying language that rates will be held near zero for a “considerable time.” But they’ll try to do so in a market-neutral fashion by substituting “considerable reduction in slack and notable progress toward the inflation goal.” They see a risk of an upward move in the “dot plot” of Fed rate forecasts and expect Yellen in the press conference to try to avoid shocking markets.