Bank of America expects Fed to hold rate hikes until ‘point of pain’ for consumer demand – Economics
Bank of America has warned that the Federal Reserve will have to keep raising interest rates until it finds “the pain point for consumer demand.” Anticipating a slowdown in consumer demand that “will lead to an outright recession,” the bank’s economist warned that “additional Fed hikes would also mean more pain for interest-rate-sensitive non-consumer sectors like housing.”
Bank of America economic warning
Bank of America chief economist Aditya Bhave issued a note earlier this week warning that the Federal Reserve could raise interest rates above market expectations in order to inflation to their target of 2%. According to a memo viewed by Fortune, the bank wrote:
The Fed will have to keep raising rates until it finds the pain point for consumer demand.
Bank of America added that as of this writing, rate hikes of 25 basis points at the upcoming Federal Open Market Committee (FOMC) meetings in March and May “appear extremely likely”. The economist also pointed out that Bank of America recently announced its Fedforecast changed to include another 25 basis point rate hike in June. Bhave continued:
The resilience of demand-driven inflation means the Fed may need to hike rates closer to 6% to bring inflation back on target.
Several other economists have warned that the Fed cannot meet its 2% inflation target without “crushing the economy,” including Allianz chief economist Mohamed El-Erian, who believes “2% is not the right target.”
Earlier this week US Treasury Secretary Janet Yellen said that “disinflation is not a straight line”. While declaring that “more work needs to be done” as “core inflation still remains at levels above what is consistent with the Fed’s target,” the Treasury Secretary dismissed the idea that a recession was inevitable is.
Commenting on Yellen’s comments, Bank of America’s chief economist stressed that “a recession looks more likely than a soft landing.” bhaves said:
A slowdown in consumer demand, which our analysis suggests is necessary to bring inflation back on target, would likely result in an outright recession.
“Consumer spending accounts for 68% of GDP, and additional Fed hikes would also spell more pain for interest-rate-sensitive non-consumer sectors like housing,” the Bank of America economist said. “Our base case is that a recession will start in Q3 2023. Risks are towards an extended period of consumer resilience, more stubborn inflation and further rate hikes by the Fed. In any case, the lesson for investors is: no pain, no gain.”
Several Fed officials have already said more rate hikes are needed to bring inflation under control. Earlier this week, Federal Reserve Bank of Atlanta President Raphael Bostic warned of “catastrophic” economic consequences if the Fed eases policy prematurely. Meanwhile, billionaire “bond king” Jeffrey Gundlach predicted “painful consequences” for the next recession, while economist Peter Schiff warned the Fed could be fighting a “full-scale economic collapse”.
Do you agree with the Bank of America economist? Let us know in the comment section below.
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