Bank of America has changed its outlook on the Federal Reserve’s path, now expecting three interest rate hikes totaling 75 basis points this year, followed by a prolonged pause, pushing any expectations of an interest rate cut into the distant future.
Analyst Aditya Bhav said Bank of America expects the Federal Reserve to raise interest rates by 25 basis points each in September, October, and December, bringing the target range for the federal funds rate to 4.25–4.50%. Bhav wrote, “We believe the Fed will keep interest rates unchanged next year, given expectations that inflation will remain high enough to prevent the real interest rate from becoming overly restrictive.”
This trend reflects Bank of America's retreat from its previous doubts about the need to cut interest rates, which it now sees as premature.
Regarding the labor market, Bhav noted that the downside risks had dissipated, with the unemployment rate remaining stable compared to last May when interest rates were 75 basis points higher.
As for inflation, the bank confirmed that the Federal Reserve's inflation problem has unequivocally worsened, with the core personal consumption expenditures index likely to reach 3.50% in May, about 70 basis points higher than last year's levels.
Bank of America also revised its reading of the Federal Reserve's response mechanism, based on the June summary of economic projections, in which nine monetary policymakers predicted an interest rate hike even without expecting a drop in the unemployment rate, suggesting that a tightening labor market is no longer a prerequisite for action.
Federal Reserve Chairman Kevin Warsh’s press conference reinforced this trend, as he noted that he had repeatedly stressed the importance of restoring price stability and suggested that monetary policy was not particularly restrictive.
Bank of America identified three main scenarios that could hinder the path of raising interest rates: a sharp slowdown in payroll data, low readings of the core personal consumption expenditures index, or a broad sell-off in the stock markets.
