Bank of America isn't backing away from its forecast for two more Federal Reserve rate hikes this year. In addition, the Wall Street bank is raising a bigger question: Will even 75 basis points of additional tightening be enough to bring inflation back to the Fed's 2% target? In a client note obtained by TheStreet, BofA's response was a typical economistic "We'll see,'' adding: "The hikes will look better in hindsight if: BofA said it continues to call for two more quarter-point hikes in October and December.
"The robustness of the nominal economy both increases the risks of inflation persistence and reduces the risks that hikes will cause a recession. However, if supply shocks prove persistent, the Fed might eventually have to choose between an extended inflation overshoot and a hard landing,'' BofA said. The unanimous 12-0 FOMC decision Sept. 16 of a 25 basis-point hike lifted the Fed's benchmark Federal Funds Rate to a range of 3.75% to 4% and was widely expected by traders and Fed watchers.
It marked a renewed hawkish push to tighten monetary policy following persistent price pressures fueled, as I reported, by rising energy costs from the Iran War and related economic geopolitical shocks. The big surprise: Fed policymakers signaled that another rate hike could be coming before the end of the year and potentially more if stubborn inflation from energy shocks and the Iran War geopolitical uncertainties don't ease. The rate hike was the result of months of public and private discussions by Fed policymakers who were trying to hold rates steady and at the same time allow inflation to return to its 2% goal — a target it has missed for 5.5 years.
The quarterly dot plot forecast, or Summary of Economic Projections, also released Sept. 16 showed showed a median year-end funds rate of 3.6%, consistent with one additional 25-basis-point hike from the current midpoint. Sixteen of 18 participating policymakers anticipate at least one additional rate increase before the end of the year. "The statement dropped language linking inflation to supply shocks (I.e., no more excuses), while the SEP showed stronger growth, higher inflation and a lower u- rate despite two hikes this year,'' the BofA note said.
BofA disagrees with dovish-leaning analysts who have argued that the Fed is making a policy mistake by raising rates. "From Warsh's monetarist perspective, the growth rate of the nominal economy is a function of the velocity of money and the money supply. The response to robust nominal growth is to slow the velocity of money by hiking rates,'' the note said, adding the data support the case for reining in nominal growth.
Fed Chairman Kevin Warsh had a reputation as an inflation hawk when he served as a Fed governor from 2006 to 2011. During a speech last month at Jackson Hole, he reaffirmed a commitment to taming inflation with a distinctly hawkish shift. At the FOMC press conference, Warsh said: "We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store.
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