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

Bank of America Expects the Fed to Keep Raising Rates Until It Finds 'Point of Pain' for Consumer Demand

Bank of America has warned that the Federal Reserve must hold elevating rates of interest till it finds “the point of pain for consumer demand.” Expecting a slowdown in client demand to “lead to an outright recession,” the financial institution’s economist cautioned that “additional Fed hikes would also mean more pain for the interest-sensitive non-consumer sectors such as housing.”

Bank of America’s Economic Warning

Bank of America senior economist Aditya Bhave printed a word earlier this week warning that the Federal Reserve might improve rates of interest past the market’s expectations to carry inflation right down to its 2% goal. According to a memo seen by Fortune, the financial institution wrote:

The Fed must hold elevating charges till it finds the purpose of ache for client demand.

Bank of America added that at this stage, 25-basis-point rate of interest hikes within the upcoming Federal Open Market Committee (FOMC) conferences in March and May “look extremely likely.” The economist additionally identified that Bank of America just lately changed its Fed forecast to incorporate an extra 25-basis-point rate of interest hike in June. Bhave continued:

The resilience of demand-driven inflation means the Fed may need to lift charges nearer to six% to get inflation again to focus on.

Several different economists have cautioned that the Fed can not attain its 2% inflation goal with out “crushing the economy,” together with Allianz chief economist Mohamed El-Erian, who believes that “2% is not the right target.”

Earlier this week, U.S. Treasury Secretary Janet Yellen stated that “disinflation is not a straight line.” While stating that “there’s more work to be done” provided that “core inflation still remains at a level that’s above what’s consistent with the Fed’s objective,” the treasury secretary dismissed the concept that a recession is inevitable.

Commenting on Yellen’s statements, the Bank of America senior economist burdened that “a recession appears more likely than a soft landing.” Bhaves opined:

A slowdown in client demand, which our evaluation suggests is important to carry inflation again to focus on, would probably result in an outright recession.

“Consumer spending makes up 68% of GDP, and additional Fed hikes would also mean more pain for the interest-sensitive non-consumer sectors such as housing,” the Bank of America economist described. “Our base case is that a recession will start in Q3 2023. Risks are skewed towards an extended period of consumer resilience, stickier inflation, and more Fed hikes. Either way, however, the lesson for investors is: No pain, no gain.”

Several Fed officers have already stated that extra fee hikes are wanted to carry inflation beneath management. Earlier this week, Federal Reserve Bank of Atlanta President Raphael Bostic warned about “disastrous” financial penalties if the Fed loosens its coverage prematurely. Meanwhile, billionaire “bond king” Jeffrey Gundlach predicted “painful outcomes” within the subsequent recession whereas economist Peter Schiff cautioned that the Fed may very well be preventing a “complete economic collapse.”

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