Bank of America Warns US Fed Could Raise Policy Rates to 6%

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Facts

  • The US Federal Reserve may raise interest rates to nearly 6%, Bank of America (BofA) Global Research reported on Monday. BofA believes that a combination of strong consumer demand and a tight labor market mean inflation will continue to be a problem for longer than expected, resulting in the Fed continuing to raise interest rates.1
  • Major stock indexes fell in February, as financial markets responded to reports of historically bad corporate earnings in the final months of 2022. The market is also reacting to fears that the Fed will continue to hike interest rates, meaning that borrowing costs will increasingly eat into corporate profits.2
  • The Fed’s inflation measurement of choice, the Core Personal Consumption Expenditures Index (CPCEI), showed prices rose 0.6% on a monthly basis and 4.7% for the 12 months ending in January 2023, in the latest report published on Feb. 24. The CPCEI excludes analysis of food or energy.3
  • Officials at the Fed continue to support interest rate hikes as a means of reducing inflation to their target of 2%. According to the latest minutes published on Feb. 22, a majority support an increase by 25 basis points (0.25%), while a minority support an even higher 50 basis-point (0.50%) increase.4
  • The Fed is raising interest rates in a deliberate attempt to slow down the US economy and reduce consumer demand — under its plan, the change will increase unemployment, thereby reducing inflation.5
  • Unemployment in the US dropped to a 53-year low of 3.4% in January, as 517K jobs were added to the economy. Despite the pain of inflation, most businesses have appeared busy over the last year.6

Sources: 1Reuters, 2Forbes, 3CNN, 4Finance, 5Guardian and 6Time.

Narratives

  • Establishment-critical narrative, as provided by Time. Deliberately slowing the economy and increasing unemployment in order to tackle inflation makes no sense and reflects a callous disregard for its destructive impact on the lives of millions of people. Most estimates say US unemployment will have to reach as high as 7.5%, more than double its current level, to get inflation down to the Fed’s target of 2%. The wage-price spiral theory doesn’t explain the current rise in prices. Wage increases can’t be driving inflation as they are continuing to lag behind it.
  • Pro-establishment narrative, as provided by Fortune. High employment and strong retail sales are undermining the Fed's efforts to tame inflation. As long as the labor market remains tight, workers remain in a strong bargaining position and can command higher wages, which in turn fuels strong consumer spending. This means that interest rates must continue to be raised aggressively now, probably well above 5%, in order to increase unemployment, until inflation is finally defeated. Failure to tackle inflation now would risk a replay of the 1970s, when inflation in the US peaked at 12%.

Predictions