Bank of America warns Fed to raise rates at ‘pain point’

It looks like America’s strong economic confidence could take another hit after analysts warned that the Fed could raise rates as high as 5.5% – despite the fact that they are already sitting high which is 16 years.

This comes after a series of gloomy headlines for the stock exchange in February: all three of the main US equity benchmarks posted a loss in February as the Dow Jones fell to his lowest level of the year so far.

Then there are those warnings from the bear side that stocks are in the “death zone”.

Wall Street strategist Mike Wilson said last week that investors are running out of time to save their returns before a “catastrophic” end is at risk.

Optimism is more shaken by the unexpected jump Inflation in January, increased by 0.5% after a 0.1% increase in December.

In a note to clients on Tuesday, Sevens Report analyst Tom Essaye, said: “The economy is yet to show any serious signs of slowing down despite extremely tight financial conditions, and given this data, the market is correct in thinking that the Fed will raise rates more than previously expected.”

5.25-5.5% increase in future?

All the above factors are leading Bank of America economist Aditya Bhave warned the Fed may need to raise rates to anywhere between 5.25% and 5.5% to “bring back inflation” in line with the targeted 2% increase per year.

Bhave added that markets are pricing in a high rate – a forecast of around 5.4% in September according to reports from Reuters– but that the truth goes beyond that.

The memo seen by luck added: “The Fed should continue to raise rates until it finds a pain point for consumer demand. At this stage, 25bp rate hikes in March and May look very likely. We recently revised our Fed forecast to include an additional 25bp hike in June. But the strength of demand-driven inflation means the Fed will need to raise rates closer to 6% to get inflation is back on target.

‘There is no straight line’

US Treasury Secretary Janet Yellen seemed ready to continue her fight against inflation when asked about the unexpected inflation balloon in January.

Talked to Reuters on India at a meeting of G20 financial leaders, Yellen said there was work to be done but rejected the idea that a recession was inevitable.

He added that the fight to get inflation back to reasonable levels “is not a straight line”, while pushing back a report from JP Morgan chief economist Michael Feroli, professor at Brandeis International Business School Stephen Cecchetti and Columbia Business School professor Frederic Mishkin, who promoted. that in the last 16 times the central bank has intervened to reduce inflation, all have resulted in economic contraction.

Yellen responded: “I don’t accept that as a general statement that must always be true. I think this report shows that it’s not a straight line – disinflation is not a straight line.

“This is a reading, but core inflation still remains at a level above what is consistent with the Fed’s objective. So, there is a lot of work to do.”

Bhave’s dissent: “A recession appears more likely than a soft landing.”

Bhave explained: “The slowdown in consumer demand, which our analysis suggests is necessary to bring inflation back to target, is likely to lead to an outright recession. Consumer spending accounts for 68% of GDP, and further Fed hikes also mean more pain for interest-sensitive non-consumer sectors like housing.

“Our base case is that a recession will begin in Q3 2023. The risks are focused on a long period of consumer stability, higher inflation and more Fed hikes. Either way , however, the lesson for investors is: no pain, no gain.

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