Bank of America warns Fed will hike rates to ‘point of pain’
It appears that optimistic confidence in the American economy could take another hit after analysts warned the Fed could hike rates as high as 5.5% – despite the fact that it is already on a 16-year -Sit high.
It comes after a series of bleak headlines for stock markets at the end of February: All three major US stock benchmarks posted losses in February as the Dow Jones fell to its year-to-date lows.
Then there were the warnings from the bear side that stocks are in the “death zone.”
Wall Street strategist Mike Wilson said last week that investors are running out of time to salvage their yields before risking a “catastrophic” end.
Optimism was further shaken by an unexpected 0.5% rise in inflation in January after rising 0.1% in December.
In a note to clients on Tuesday, Tom Essaye, an analyst at Sevens Report, said: “The economy is not yet showing serious signs of slowing down despite tighter financial conditions and given this data the market is right to expect the Fed to hike rates more than previously expected.”
5.25-5.5% rate hikes coming?
All of the above factors have led Bank of America economist Aditya Bhave to warn the Fed that it may need to hike rates to 5.25% to 5.5% to keep inflation in line with target “Get Back” up 2% YoY. Year.
Bhave adds that markets are pricing in a rate hike – forecast of around 5.4% by September, according to reports from Reuters– but that the reality goes beyond that.
The memo seen by wealth adds: “The Fed will have to keep raising rates until it finds the pain point for consumer demand. At this stage, rate hikes of 25 basis points in March and May look highly likely. We recently revised our Fed forecast to include another 25 basis point hike in June. But the resilience of demand-driven inflation means the Fed may need to hike rates closer to 6% to bring inflation back on target.”
“No Straight Lines”
US Treasury Secretary Janet Yellen appeared ready to continue her fight against inflation when asked about the unexpected surge in inflation in January.
Speak with Reuters In India, at a G20 meeting of financial leaders, Yellen said there was still work to be done but dismissed the idea that a recession was inevitable.
She added that the fight to bring inflation down to reasonable levels is “not a straight line” while reading a report by Michael Feroli, JP Morgan’s chief economist, Stephen Cecchetti, a professor at Brandeis International Business School, and Frederic Mishkin, Professor at Columbia Business School, pushed back that in the past 16 instances where the central bank has intervened to reduce inflation, all have resulted in a contraction in the economy.
Yellen counters: “I don’t accept that as a blanket statement that always has to be true. I think this report has shown that it will not be a straight line – disinflation is not a straight line.
“It’s a reading, but core inflation still remains at levels above what’s consistent with the Fed’s target. So there is still more to do.”
Bhave disagrees: “A recession seems more likely than a soft landing.”
Bhave explains: “A slowdown in consumer demand, which our analysis indicates is necessary to bring inflation back on target, would likely result in an outright recession. Consumer spending accounts for 68% of GDP, and additional Fed hikes would also mean more pain for interest-rate-sensitive non-consumer sectors like housing.
“Our baseline scenario is that a recession begins in Q3 2023. Risks are towards an extended period of consumer resilience, more stubborn inflation and further Fed rate hikes. In any case, the lesson for investors is: no effort, no gain.”
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