Bank of America Keeps Three Rate Hike Forecast for Fed in 2023
Aditya Bhave, Chief Economist at Bank of America (BofA), reaffirmed his outlook that the Federal Reserve will implement three additional interest rate hikes for the remainder of 2023, even after July’s Consumer Price Index (CPI) report met consensus expectations. The July CPI rose by 0.1% month-over-month and 3.4% year-over-year, matching market projections.
Inflation Data Stability Doesn’t Ease Rate Hike Pressure
Though the July inflation figures did not exceed forecasts, Bhave highlighted the necessity for the Fed to retract last year’s aggressive policy easing, specifically the 75 basis point rate cut, which he sees as premature in response to labor market concerns that ultimately did not materialize. "The Fed needs to claw back the 75 basis points cut from last year," Bhave noted, referencing the move made to guard against labor market downturn risks that failed to emerge.
Labor Market Weakness Concerns May Be Overstated
Following a weaker-than-expected July jobs report, Bhave cautioned that seasonal adjustments and statistical noise likely influenced the data. He pointed out that the average monthly job additions over the past year were roughly 50,000, a healthy figure considering the limited growth in the labor force size. This suggests the labor market remains resilient despite some fluctuations.
Rising Long-Term Yields Reinforce Need for Rate Increases
Bhave also drew attention to the rise in long-term borrowing costs, with 30-year U.S. Treasury yields nearing 5.25%, levels comparable to those at the start of this year when the Fed paused its rate hikes. He warned that halting rate increases now could unanchor long-term yields, raising financial stability risks if inflation accelerates again.
He anticipates that the first rate hike after the current pause may come as early as September but could be delayed until December, with no expected moves before the October elections.
Divergent Views on Wall Street and Market Caution
Not all economists share Bhave’s hawkish stance. For instance, Tom Porcelli, Chief Economist at Wells Fargo, believes the Fed may hold rates steady until the end of 2026. Meanwhile, CME Group’s FedWatch tool shows the market’s probability of a rate hike in September has declined to around 42%.
Despite this, Bhave remains convinced that core inflation will remain above target and the labor market nearing equilibrium reinforces the case for further tightening. The market will closely watch the Fed’s policy signals in September for clearer direction.
These perspectives underscore the Fed’s challenging balancing act amid stable inflation and mixed labor data, with monetary policy adjustments likely to keep market participants attentive to upcoming economic releases and central bank communications.