BCA Research says that the U.S. Federal Reserve Board believes that interest rates have dropped enough, and markets are now looking for a hike by the end of the year. But it cautions that the Fed doesn’t have a great deal of conviction about the outlook.

In a research note, BCA reports that the latest FOMC minutes noted that the April decision to lower rates was a “close call”.

“The Fed’s economic expectations are subdued with a mild first-half recession, followed by a moderate upturn,” it says. “But there is no appetite for a more aggressive easing given lingering concerns about upside risks to inflation.” Also, the reduction in credit market strains is a further reason to stay on hold, it adds.

“Nonetheless, the minutes, together with recent remarks by vice-chairman Kohn, highlight that policymakers remain nervous about the outlook, and are keeping their options open,” it says.

The markets are pricing a 50% chance that the Fed will hike rates by 25 basis points before the end of the year, BCA adds, suggesting, “that seems premature given the prospect that the economy will continue to struggle.”