As the September Federal Open Market Committee (FOMC) meeting approaches, Bank of America is making waves with its unexpected take on the future of interest rates.
In a note authored by Michael Gapen and Mark Cabana on Monday, Bank of America presented its preview of the upcoming FOMC meeting.
While the consensus points to the Fed ending the tightening campaign in 2023, Bank of America stands in stark contrast, leaning towards one more rate hike at the November meeting.
Bank of America’s projection for the 2023 median policy rate forecast is a single additional 25 basis point hike, culminating in a terminal rate range of 5.5-5.75%. However, their most noteworthy forecast centers on 2024, where they anticipate only 75 basis point of cuts.
See Also: What Will The Federal Reserve’s Next Move Be?
A Contrarian Call
Bank of America’s stance contradicts the current market sentiment, where investors assign a 71% probability to the Fed maintaining rates unchanged in November.
Furthermore, it is in stark contrast with Goldman Sachs, which firmly seats in the “no-more hike camp”, foreseeing the Fed holding steady in 2023 and delivering a full percentage point of rate cuts in 2024.
Bank of America anticipates Fed Chair Jerome Powell emphasizing the need to address inflation and the Fed’s commitment to achieving a 2% target. Powell is likely to underscore the importance of data-driven decisions in their policy approach.
‘Higher For Longer’
In terms of market implications, Bank of America thinks that if the Fed keeps rates unchanged while maintaining the 2023 median dot, thus suggesting one more rate hike, it could strengthen the US dollar (USD), as monitored by the Invesco DB USD Index Bullish Fund ETF UUP.
However, the removal of at least one of the four 25 basis point cuts for 2024, as implied by the current SEP, could have a more significant impact.
Such a move would potentially delay the start of the cutting cycle, reinforcing the “higher for longer” policy stance.
Bank of America has consistently argued that market pricing of Fed cuts is excessive, considering the resilience of economic growth and persistent inflation risks, even accounting for potential risks of a hard economic landing.
Bank Of America: Economic Forecasts
| Summary of Economic Projections | 2023 | 2024 | 2025 | 2026 | Longer Run |
|---|---|---|---|---|---|
| Real GDP Growth | |||||
| BofA Forecast of September SEP | 2.0 | 1.0 | 1.8 | 1.8 | 1.8 |
| June SEP | 1.0 | 1.1 | 1.8 | 1.8 | |
| Unemployment | |||||
| BofA Forecast of September SEP | 3.8 | 4.2 | 4.2 | 4.0 | 4.0 |
| June SEP | 4.1 | 4.5 | 4.5 | 4.0 | |
| PCE Inflation | |||||
| BofA Forecast of September SEP | 3.3 | 2.6 | 2.1 | 2.0 | 2.0 |
| June SEP | 3.2 | 2.5 | 2.1 | 2.0 | |
| Core PCE Inflation | |||||
| BofA Forecast of September SEP | 3.7 | 2.8 | 2.2 | 2.0 | |
| June SEP | 3.9 | 2.6 | 2.2 | ||
| Fed Funds Rate (Median) | |||||
| BofA Forecast of September SEP | 5.6 | 4.9 | 3.9 | 2.9 | 2.6 |
| June SEP | 5.6 | 4.6 | 3.4 | 2.5 |
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