The bank’s research team said ‘if markets settle down’ the Fed remains on track to make the long-expected change.
The big caveat to this view however, is that if the turmoil continues over the coming weeks this may tip the scales in favour of delaying the action until October or November, BAML said.
A ‘more severe shock’ to the economy could result in a longer delay, BAML’s team added.
“It’s getting interesting,” BAML said. “For some time our view has been that absent a shock or a sharp slowing in the data, the Fed would hike in September. The data are cooperating. We expect 2Q GDP growth to be revised up from 2.3 to 3.4% tomorrow and we continue to track 2.8% growth in 3Q.”
“More important, the Fed is clearly putting a big emphasis on the labor market and they are getting just what they want,” the team continued. “Payroll growth has averaged 211,000 this year and shows no sign of slowing. Both the narrow and broad unemployment rate continue to trend lower, falling 0.3 and 0.8 pp respectively this year. Inflation remains low, but “the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.”
BAML noted that the present situation in which there is a ‘stark contrast between the domestic data and the markets’ is an example of when investors should consider potential responses to multiple scenarios.
