BofA Merrill cuts 2016 US interest rate forecasts

Analysts at Bank of America-Merrill Lynch revised down their forecasts for the number of Fed rate hikes they expected in 2016, adding that markets were exaggerating the risk of an economic recession Stateside.

The broker now expected the US central bank to raise rates twice over the coming year, up from a prior expectation for three or four.

"In our view, not only is fear trumping fundamentals, but the fundamentals for the equity market are worse than for the overall economy," BofA Merrill said in a research note sent to clients.

According to the analysts, the odds of a recession in the US were 25%, versus market pricing of 50% odds.

However, there was a 40% probability the Fed might have to either stop raising rates or cut them before the end of 2016.

In the same note, BofA upped its year-end forecast for the euro/dollar from 0.95 to 1.0 while lowering that for the US dollar/yen currency pair from 120 to 110.

Ten-year US Treasury note yields were now seen finishing the year at 2.0%, in comparison to a prior forecast of 2.65%.

"Unfortunately, the Fed is only likely to capitulate if there are either significant signs of further financial stress or clear signs that growth is dropping below potential."