Bank of America has warned that the Federal Reserve will need to keep raising interest rates until it finds a “pain point for consumer demand.” Expecting the slowdown in consumer demand to “lead to a full-blown recession,” the bank’s economist warned that “further Fed hikes would also mean more pain for interest-sensitive non-consumer sectors such as housing.”
Bank of America Economic Alert
Bank of America Senior Economist Aditya Bhave issued a note earlier this week warning that the Federal Reserve may raise interest rates beyond market expectations to bring inflation down to its 2% target. According to a note seen of Fortune, the bank wrote:
The Fed will have to keep raising interest rates until it finds the pain point for consumer demand.
Bank of America added that at this stage, 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 changed the Fed’s forecast to include an additional 25 basis point interest rate hike in June. Bhave continued:
The persistence of demand-driven inflation means the Fed may need to raise interest rates closer to 6% to bring inflation back to 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 that “2% is not the right target.”
Earlier this week, US Treasury Secretary Janet Yellen said that “disinflation is not a straight line”. While stating that “there is more work to be done” given that “core inflation still remains at a level that is above what is consistent with the Fed’s target”, the Treasury Secretary dismissed the idea that recession is inevitable.
Commenting on Yellen’s statements, Bank of America’s senior economist stressed that “a recession looks more likely than a soft landing.” Bhaves opined:
The slowdown in consumer demand that our analysis suggests is needed to bring inflation back to target is likely to lead to a full-blown recession.
“Consumer spending makes up 68% of GDP, and additional Fed hikes would also mean more pain for interest-sensitive non-consumer sectors such as housing,” the Bank of America economist described. “Our base case is that a recession will begin in the third quarter of 2023. Risks are skewed toward a prolonged period of consumer resilience, stronger inflation and more Fed hikes.” Either way, 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 Bostick warned of “catastrophically” economic consequences if the Fed loosens policy prematurely. Meanwhile, billionaire “bond king” Jeffrey Gundlach predicted “painful results” in the next recession, while economist Peter Schiff warned that the Fed could struggle with “total economic collapse.”
Do you agree with the Bank of America economist? Let us know in the comments section below.
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