VIEW: BofA: Excess Tightening In Bank Lending Standards To Substitute For Policy Rate Firming

Bank of America write “the outcome of the March FOMC was broadly as we expected. The Fed lifted its policy rate by 25bp. That said, the Fed has taken on board some amount of tightening in credit standards and terms as a result of the recent stresses that emerged from several regional banks. This was reflected in the statement by saying "some additional policy rate firming may be appropriate" versus prior language that said "ongoing" rate hikes may be needed.”

• “We agree that some amount of unexpected tightening in bank lending standards may be forthcoming. In other words, the US economy may see tighter lending standards than what could be explained by macroeconomic fundamentals. If so, our view is that it could indeed substitute for further rate hikes. Hence, we no longer expect a 25bp rate hike in June and now foresee a terminal target funds rate of 5.00-5.25% reached in May.”
• “Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional rate hikes beyond May, but for now, we think that risks are in the direction of an earlier end to the tightening cycle.”