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The Federal Reserve has tolerated inflation above its 2% target for five years as it navigated a series of shocks, but analysts at Bank of America said that patience is coming to an end.<\/p>\n
In a note on Monday, BofA changed its forecast and predicted the Fed will raise rates by a quarter point three times this year, lifting the benchmark rate to 4.25%-4.5% from the current 3.5%-3.75% range. <\/p>\n
The bank\u2019s previous base case was for rates to remain steady through the year. But last week\u2019s Federal Open Market Committee meeting, where half of policymakers predicted rate hikes, as well as new Fed Chairman Kevin Warsh\u2019s surprisingly hawkish remarks prompted analysts to change their view.<\/p>\n
The Fed kept rates on hold last week, and BofA sees it doing the same next month. Then the first increase should come in September, the bank predicted, followed by another in October and December, reversing the last cut made last year, when the central bank lowered the federal fund by 0.25 percentage points on Dec. 10, 2025.<\/p>\n
Since then, the economic landscape changed dramatically. In the fall, the Fed cut rates as job data weakened while anticipating President Donald Trump\u2019s tariffs would only have short-term impact on inflation. But the labor market strengthened this year, and Trump\u2019s Iran war sent oil prices soaring. <\/p>\n
\u201cMeanwhile, the Fed\u2019s inflation problem has gotten\u00a0unambiguously\u00a0worse,\u201d BofA said.\u00a0\u201cCore PCE\u00a0could reach 3.5% in May, nearly\u00a070bp higher than it was a year ago. The pickup has been\u00a0partly due to tariffs and other one-offs. The Fed was willing to look through the tariffs, but it is losing patience after the latest round of supply shocks. Also,\u00a0housing-driven\u00a0disinflation\u00a0has now\u00a0mostly run its course, while\u00a0other\u00a0core services remain very sticky.\u201d<\/p>\n
The note highlighted Fed policymakers\u2019 forecasts that showed several expecting rate hikes even though the unemployment rate isn\u2019t seen falling. That upended BofA\u2019s assumption that a tighter labor market would be a pre-requisite for hikes.<\/p>\n
The projections also put inflation at 2.5% by the end of next year\u2014still above the Fed\u2019s target\u2014indicating prices will remain sticky even after one-off effects this year roll off.<\/p>\n
Wall Street has started pricing in the risk of a hawkish Fed. On Monday, the 10-year Treasury yield jumped 4.6 basis points to 4.497%, despite Brent crude prices falling 4% to $77.29 a barrel.<\/p>\n
It\u2019s possible the Fed could hold off on tightening if job growth slows down sharply, inflation cools, or stocks tumble, according to BofA, adding that Warsh could also be \u201cstrategically hawkish\u201d to gain credibility while biding his time to cut later.<\/p>\n
But analysts also pointed out that Warsh didn\u2019t push back on the notion of rate hikes and suggested monetary policy isn\u2019t totally restrictive.<\/p>\n
That\u2019s as a gusher of money is coming out of Wall Street as companies are on pace to raise trillions of dollars in stock and debt offerings this year. In his press briefing on Wednesday, Warsh nodded to this flood of capital, even as he said that monetary policy overall is \u201csomewhat restrictive.\u201d<\/p>\n
\u201cI would have a hard time managing to say those words if I were to see what\u2019s happening in financial markets,\u201d he admitted. \u201cSo I\u2019d say it\u2019s uneven. That\u2019s perhaps a function of different transmission mechanisms of monetary policy, whether monetary policy is coming from our interest rate tool or our balance sheet tool.\u201d<\/p>\n
But Chen Zhao, chief global strategist at Alpine Macro, said in a note Monday that rate hikes are unlikely. The end of the Iran war could send oil prices to $50-$60 a barrel, helping inflation get back down. Meanwhile, small businesses are struggling, AI is already improving productivity, and wage growth is weakening.<\/p>\n
\u201cThe bottom line is that while half of the Fed\u2019s voting members may be signaling their intention to raise rates, the odds of actual tightening remain very low,\u201d Zhao wrote. \u201cWe maintain our view that inflation will begin to decline later this year as these transitory shocks pass through the system.\u201d<\/p>\n
#Fed #bring #hammer #inflation #series #rate #hikes #year #BofA<\/p>\n","protected":false},"excerpt":{"rendered":"
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