Front-end Treasury yields are the cleanest expression of this view, since two more hikes would keep pressure on two-year yields, and BofA’s rates strategists already lean that way. A firmer rate path supports the dollar, which rose this week by the most in three months, and adds to the pressure on rate-sensitive equities and long-duration assets. October becomes the pivotal Fed meeting, as a hold would challenge BofA’s call and a hike would confirm it. Energy-driven inflation prints matter most from here, because they decide whether the supply-shock story fades or keeps feeding into demand.
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Earlier:
- Fed’s first hike since 2023: what history says about the S&P 500 over the next year
- Weeeknd – Fed’s Kashkari says inflation still too high across US economy, not just energy
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BofA argues the Fed rarely stops after one hike and, with nominal spending running well above the level tied to hot core inflation, sees October and December increases as the likeliest path.
Summary:
- Bank of America retained its call for two more quarter-point Fed hikes this year, in October and December, following September’s unanimous 12-0 increase to 3.75%-4.00%.
- BofA analysts said tightening cycles are generally front-loaded and that the Fed almost never stops after one hike.
- Nominal consumer spending is up 6.3% on the year, well above the 5% level historically associated with above-target core inflation, so BofA says the Fed has little choice but to restrain demand.
- The bank said the strength of the nominal economy raises the risk of inflation persistence and lowers the risk that hikes cause a recession, though persistent supply shocks could force a choice between an inflation overshoot and a hard landing.
- BofA’s economists expect no policy action in 2027. Two more hikes would take the target range to 4.25%-4.50%.
- BofA’s rates strategists, a separate team, argue the market underestimates where the cycle ends and see room for the policy rate to move above 5%.
Bank of America is sticking with its call for two more quarter-point Federal Reserve rate hikes this year, in October and December, arguing that strong spending leaves the central bank little choice but to keep tightening. In a note, BofA analysts said tightening cycles are generally front-loaded and that the Fed almost never stops after a single hike, a reference to the quarter-point increase to 3.75%-4.00% delivered on September 16 in a unanimous 12-0 vote.
The bank’s central argument rests on nominal consumer spending, which is up 6.3% on the year. BofA said that is well above the 5% level historically associated with above-target core inflation, and concluded that the Fed has little choice but to restrain demand. Its economists also wrote that the strength of the nominal economy increases the risk of inflation persistence while reducing the risk that hikes cause a recession. Two more increases would take the target range to 4.25%-4.50%, and BofA expects no policy action in 2027.
The call sits alongside signals from the Fed itself. The latest projections showed all but two officials see at least one more quarter-point increase this year, and Fed Chairman Kevin Warsh estimated that inflation on the Fed’s preferred gauge was around 3.6% in August. BofA’s forecast goes further than the projections, with two hikes and not one. Reports have said markets were leaning toward one more increase, most likely in December, although pricing differs between sources, and Goldman Sachs has said another hike could come as early as October.
BofA also flagged risks around its own view. It said that if supply shocks prove persistent, the Fed might eventually have to choose between an extended inflation overshoot and a hard landing. Separately, BofA’s rates strategists, who are a different team from its economists, argue the market is underestimating where the hiking cycle ends. They point to a Taylor rule measure suggesting the funds rate should be above 5% and expect two-year Treasury yields to rise to 5%.
What follows is investingLive’s read. The 5% threshold gives a clear test for BofA’s call. If spending growth stays well above it, the case for October and December looks intact, and if it drifts back toward that level or the energy shock eases, the case for the second hike weakens. Minneapolis Fed President Neel Kashkari said on Sunday that inflation is too high across the economy and not only in energy, which fits the direction of BofA’s argument, although it does not signal any decision on the pace of hikes.
This article was written by Eamonn Sheridan at investinglive.com.