BofA’s forecast reflects ‘the Fed’s acceptance that they are behind the curve’ on inflation, said the bank’s economists.
Federal Reserve Chairman Jerome Powell made clear in a talk this week that he’s open to 50-basis point increases in interest rates, if necessary.
The Fed is reacting to rampant inflation, with consumer prices soaring 7.9% in the 12 months through February, the highest rate in 40 years.
The central bank kicked off its rate-hike campaign last week with a 25-basis point move, putting its federal funds rate target at 0.25%-0.5%. The fed funds rate applies to overnight interbank loans
The Fed’s median forecast, released with news of the rate rise, projected six more rate hikes this year, assuming each was 25 basis points.
But now two major banks, Goldman Sachs and Bank of America, predict the Fed will execute two 50-basis point hikes in coming months.
Goldman economists, led by Jan Hatzius, predict the Fed will go 50 basis points at its meetings in May and June. And BofA economists, led by Ethan Harris, forecast the Fed will do it in June and July.
Goldman’s economists were struck by the change in Powell’s language to citing the need “to move expeditiously,” after using the word “steadily” in January.
That shift signals a 50-basis point hike is coming, the economists said. They also expect four 25 basis point rate hikes in the second half of the year.
“The Russian invasion of Ukraine and the possibility that financial conditions could tighten more aggressively in response to a faster pace of Fed tightening both present downside risks to our new forecast of two 50-basis point rate hikes, though neither looks like an obstacle at this point,” the economists said.
BofA’s economists weighed in with their take on the situation.
“We have changed our call reflecting the Fed’s acceptance that they are behind the curve,” the bank’s economists said. “The Fed will be emboldened by the resilience of the economy and financial markets. The remaining question is whether it will be willing to impose serious pain on the economy to rein in inflation.”
In addition to the two 50-basis point increases, the economists project 25 basis-point rises at all other meetings until the fed funds rate target hits 3% to 3.25% in May 2023.
