Fed Likely To Resume Rate Hikes In December As Economy's Strength Continues, Says Bank of America

Analysts at Bank of America stated the Federal Reserve will resume interest rate hikes in December 2023, following a period of “watch and see.”

In a note released on Friday, the team led by economist Michael Gapen stated they no longer anticipated a rate hike in November. Instead, they believed policymakers would likely opt for one final increase at the last meeting of the year.

Bank of America highlighted the three most significant monthly economic indicators — the jobs report, the Consumer Price Index (CPI) and retail sales — all exceeded expectations last month, backing the view of a further rate increase.

Data	September’s Figure	Estimates
CPI	3.7% year on year	3.6% year on year
Non-farm payrolls	336,000	170,000
Retail Sales	0.7% month on month	0.3% month on month

U.S. Economy Is Beating Expectations ‘By A Long Way’

“The economy is beating expectations. By a long way,” BofA wrote. According to its estimates, U.S. GDP growth is poised to reach an annualized rate of 4.5% in the third quarter, slightly above the 4.4% predicted by the economist consensus.

During Fed Chair Jerome Powell’s speech on Thursday at the meeting organized by the Economic Club of New York, he mentioned “additional” evidence of strong growth or a tight labor market would justify further rate hikes. Meanwhile, Fed Gov. Christopher Waller explicitly expressed concern about the risk of housing inflation re-accelerating.

In essence, both Powell and Waller have left the door open for another rate hike, which, according to Bank of America, could now materialize in December.

According to CME Group Inc. CME’s FedWatch tool, markets are assigning only a 25% chance of a Fed rate hike in December, highlighting Bank of America’s contrarian call.

One factor that could potentially delay the final rate hike until 2024 is a potential government shutdown, coupled with an extended UAW strike. A government shutdown might disrupt data availability leading up to the December meeting, making it unlikely for the Fed to raise rates without adequate information.

Bank of America expects the first rate cut to occur in June 2024, with quarterly reductions of 25 basis points in the policy rate, totaling 75 basis points of rate cuts in 2024 and 100 basis points of cuts in 2025.

Regarding the bank’s predictions for Treasury yields, BofA anticipates the 10-year Treasury, as tracked by the US 10-Year Treasury Note ETF UTEN, will yield 3.80% in March 2024 and 3.50% by December 2024. This would imply a substantial fall in yields, and thus rise in value, compared to current market levels.

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