Bank of America Expects the Fed to Keep Hiking Rates Until ‘Point of Pain’ for Consumer Demand

Bank of America has warned that the Federal Reserve will have to keep raising interest rates until it finds “the point of pain for consumer demand.” Expecting a slowdown in consumer demand to “lead to an outright recession,” the bank’s economist cautioned that “additional Fed hikes would also mean more pain for the interest-sensitive non-consumer sectors such as housing.”

Bank of America senior economist Aditya Bhave published a note earlier this week warning that the Federal Reserve could increase interest rates beyond the market’s expectations to bring inflation down to its 2% target. According to a memo seen by Fortune, the bank wrote:

The Fed will have to keep raising rates until it finds the point of pain for consumer demand.

Bank of America added that at this stage, 25-basis-point interest rate hikes in the upcoming Federal Open Market Committee (FOMC) meetings in March and May “look extremely likely.” The economist also pointed out that Bank of America recently changed its Fed forecast to include an additional 25-basis-point interest rate hike in June. Bhave continued:

The resilience of demand-driven inflation means the Fed might have to raise rates closer to 6% to get inflation back to target.

Several other economists have cautioned that the Fed cannot reach 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, U.S. Treasury Secretary Janet Yellen said that “disinflation is not a straight line.” While stating that “there’s more work to be done” given that “core inflation still remains at a level that’s above what’s consistent with the Fed’s objective,” the treasury secretary dismissed the idea that a recession is inevitable.

Commenting on Yellen’s statements, the Bank of America senior economist stressed that “a recession appears more likely than a soft landing.” Bhaves opined:

A slowdown in consumer demand, which our analysis suggests is necessary to bring inflation back to target, would likely lead to an outright recession.

“Consumer spending makes up 68% of GDP, and additional Fed hikes would also mean more pain for the interest-sensitive non-consumer sectors such as housing,” the Bank of America economist described. “Our base case is that a recession will start in Q3 2023. Risks are skewed towards an extended period of consumer resilience, stickier inflation, and more Fed hikes. Either way, however, the lesson for investors is: No pain, no gain.”

Several Fed officials have already said that more rate hikes are needed to bring inflation under control. Earlier this week, Federal Reserve Bank of Atlanta President Raphael Bostic warned about “disastrous” economic consequences if the Fed loosens its policy prematurely. Meanwhile, billionaire “bond king” Jeffrey Gundlach predicted “painful outcomes” in the next recession while economist Peter Schiff cautioned that the Fed could be fighting a “complete economic collapse.”

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