Bank of America warns that energy shocks may not necessarily mean a hawkish stance from the Federal Reserve, indicating that the risk of significant interest rate cuts has also increased

Bank of America economist Aditya Bhave warned that investors betting on the Federal Reserve taking a hawkish stance in response to rising oil prices may misunderstand the Fed's position, as supply shocks could also lead to stable or even significantly lower interest rates.

He pointed out that energy shocks do not necessarily imply a hawkish stance, as they may create a conflict between the central bank's dual mandate of price stability and supporting employment. The risk of maintaining interest rates unchanged for an extended period increases, and there is a tail risk of rate hikes, but the risk of significant rate cuts is even greater. He believes that the current weak labor market, moderate inflation rise, and limited fiscal support mean that if the oil shock persists, the Fed will adopt a more dovish policy.

Short-term Treasury yields have risen by about 20 basis points this month, with traders expecting a 40 basis point rate cut from the Fed this year, down from expectations of over 60 basis points before the outbreak of the U.S.-Iran conflict