Bank of America warned that the Federal Reserve must keep raising interest rates until it finds “a consumer demand pain point.” Predicting that a slowdown in consumer demand would “lead to a full recession,” the bank’s economists warned that “additional Fed rate hikes would mean more pain for interest rate-sensitive non-consumer sectors such as housing.”
Bank of America’s Economic Warning
Bank of America senior economist Aditya Barbe released a note earlier this week warning that the Federal Reserve may raise interest rates more than markets expect in order to bring inflation down to its 2% target. According to thememoseen by Fortune, the bank wrote:
the Fed will have to keep raising rates until it finds a pain point in consumer demand.
Bank of America added that at this stage, a 25 basis point rate hike at the upcoming March and May FOMC meetings is “very likely.” The economist also noted that Bank of America recently changed its Fed forecast to include an additional 25 basis point rate hike in June, Bhave continued, “The Fed is now looking for a 25 basis point hike in the next two months.
The resilience of demand-driven inflation means that the Fed may have to raise rates closer to 6% to bring inflation back to target.
Several other economists have warned that the Fed cannot achieve its 2% inflation target without “crushing the economy.” Mohamed El-Erian, chief economist at Allianz, is one such economist who believes that “2% is not the right target.
Earlier this week, U.S. Treasury Secretary Yellen said that “disinflation is not a straight line.” While stating that “more needs to be done” as “core inflation remains above levels consistent with the Fed’s target,” the Treasury Secretary dismissed the idea that a recession is inevitable.
Commenting on Yellen’s remarks, a senior economist at Bank of America emphasized that “a recession seems more likely than a soft landing.”
Barbs opined.
Our analysis is that the slowdown in consumer demand needed to bring inflation back to target is more likely to lead to a full recession.
“Consumer spending accounts for 68% of GDP, and an additional Fed hike would mean more pain for interest rate sensitive non-consumer sectors such as housing,” explained a Bank of America economist. ‘Our base case is that the recession will begin in the third quarter of 2023. Risks are skewed toward prolonged consumer resilience, stronger inflation, and additional Fed rate hikes. But in any case, the lesson for investors is this: the Fed will not be able to make a decision on the economy. No pain, no gain.”
Several Fed officials have already stated that more rate hikes are needed to keep inflation in check. Earlier this week, Federal Reserve Bank of Atlanta President Raphael Bostic warned of “dire” economic consequences if the Fed loosens policy prematurely. Meanwhile, billionaire “bond king” Jeffrey Gundlach predicted “painful consequences” in the next recession, and economist Peter Schiff warned that the Fed could fight a “complete economic collapse.”
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