Bank of America Expects the Fed to Keep Hiking Rates Until ‘Point of Pain’ for Consumer Demand

Bank of America has warned that the Federal Reserve volition person to support raising involvement rates until it finds “the constituent of symptom for user demand.” Expecting a slowdown successful user request to “lead to an outright recession,” the bank’s economist cautioned that “additional Fed hikes would besides mean much symptom for the interest-sensitive non-consumer sectors specified arsenic housing.”

Bank of America’s Economic Warning

Bank of America elder economist Aditya Bhave published a enactment earlier this week informing that the Federal Reserve could summation involvement rates beyond the market’s expectations to bring ostentation down to its 2% target. According to a memo seen by Fortune, the slope wrote:

The Fed volition person to support raising rates until it finds the constituent of symptom for user demand.

Bank of America added that astatine this stage, 25-basis-point involvement complaint hikes successful the upcoming Federal Open Market Committee (FOMC) meetings successful March and May “look highly likely.” The economist besides pointed retired that Bank of America precocious changed its Fed forecast to see an further 25-basis-point involvement complaint hike successful June. Bhave continued:

The resilience of demand-driven ostentation means the Fed mightiness person to rise rates person to 6% to get ostentation backmost to target.

Several different economists person cautioned that the Fed cannot scope its 2% ostentation people without “crushing the economy,” including Allianz main economist Mohamed El-Erian, who believes that “2% is not the close target.”

Earlier this week, U.S. Treasury Secretary Janet Yellen said that “disinflation is not a consecutive line.” While stating that “there’s much enactment to beryllium done” fixed that “core ostentation inactive remains astatine a level that’s supra what’s accordant with the Fed’s objective,” the treasury caput dismissed the thought that a recession is inevitable.

Commenting connected Yellen’s statements, the Bank of America elder economist stressed that “a recession appears much apt than a brushed landing.” Bhaves opined:

A slowdown successful user demand, which our investigation suggests is indispensable to bring ostentation backmost to target, would apt pb to an outright recession.

“Consumer spending makes up 68% of GDP, and further Fed hikes would besides mean much symptom for the interest-sensitive non-consumer sectors specified arsenic housing,” the Bank of America economist described. “Our basal lawsuit is that a recession volition commencement successful Q3 2023. Risks are skewed towards an extended play of user resilience, stickier inflation, and much Fed hikes. Either way, however, the acquisition for investors is: No pain, nary gain.”

Several Fed officials person already said that much complaint hikes are needed to bring ostentation nether control. Earlier this week, Federal Reserve Bank of Atlanta President Raphael Bostic warned astir “disastrous” economical consequences if the Fed loosens its argumentation prematurely. Meanwhile, billionaire “bond king” Jeffrey Gundlach predicted “painful outcomes” successful the adjacent recession portion economist Peter Schiff cautioned that the Fed could beryllium warring a “complete economical collapse.”

Do you hold with the Bank of America economist? Let america cognize successful the comments conception below.

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