Fed Still Hawkish After July Minutes, Bank of America Says

  • The latest Federal Reserve minutes suggest it will hike interest rates to around 4%, a Bank of America economist said.
  • Investors shouldn’t expect a pause in rate hikes anytime soon, Aditya Bhave told CNBC on Wednesday.
  • “The hawks still carry the day,” he said. “There’s a risk we see a nominal rate of 4%, or maybe a little higher.” 

Minutes from the latest Federal Reserve meeting suggest that the US central bank could hike real interest rates to at least 4%, Bank of America’s senior US and global economist has said.

Fed policymakers attending the July meeting said interest rates would have to be maintained at a “sufficiently restrictive level” to curb soaring inflation, according to the July minutes released Wednesday.

Since the meeting, investors have been buoyed by hopes the July’s Consumer Price Index report, which showed inflation easing to 8.5%, might prompt the Fed to rethink its plan for aggressive monetary tightening.

But Bank of America’s Aditya Bhave believes the minutes suggest its policymakers won’t be swayed by one-off data points, and it will hike interest rates to 4% or higher.

“The hawks still carry the day,” he told CNBC’s ‘Power Lunch’ on Wednesday.

The economist expects the Fed to ease off slightly when its policymakers next meet in September, raising interest rates by 50 basis points rather than by 75 basis points — the level seen in its last hikes. He also sees the central bank maintaining a long-term target of at least 4%, even if the US inflation rate continues to fall.

“The language is consistent with our base case for a 50 basis point hike,” he said. “But that doesn’t mean that we expect a lower nominal rate.”

On the one hand, there is less urgency for the Fed to raise rates in the near term, as inflation is lower, Bhave added.

“But on the other hand, it means that consumer spending and the broader economy holds up a little bit better — which means there’s less conflict between the Fed’s two mandates, and so they can keep hiking,” he said.

The Fed has to balance two mandates: to ensure price stability and maximum employment. While inflation has hit four-decade highs this year, the US labor market has remained robust.

Bhave isn’t the only Wall Street strategist to forecast a long-term nominal rate of around 4%.

HSBC economist Ryan Wang expects the Fed to raise rates by 50 basis points in September and November, and then by 25 basis points in December and February. That would lift the federal funds target range to between 3.75 and 4%.

“The minutes of the 26-27 July FOMC meeting showed that the policymakers remain committed to raising policy rates further in an effort to prevent an unmooring of inflation expectations,” he said in a research note published Wednesday.

Read more: Bank of America: Buy these 7 stocks that will outperform the market when the Fed pivots to cutting interest rates

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