BofA sticks with October, December Fed hike call as spending stays hot

Front-end Treasury yields most directly reflect this outlook, because two additional hikes would maintain pressure on two-year yields, and BofA's rates strategists already hold that position. A steeper rate path underpins the dollar, which posted its largest weekly gain in three months, while adding strain on rate-sensitive equities and long-duration assets. October emerges as the key Fed meeting, since a pause would undercut BofA's forecast and a move would validate it. Energy-driven inflation readings carry the most weight going forward, as they determine whether the supply-shock narrative fades or continues to feed into demand.

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Earlier:

• Fed's first hike since 2023: what history says about the S&P 500 over the next year
• Weeeknd - Fed's Kashkari says inflation still too high across US economy, not just energy

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BofA contends that the Fed rarely halts after a single move and, given that nominal spending is running far above the level linked to elevated core inflation, sees October and December increases as the most probable route.

Summary:

• Bank of America held firm on its projection for two more quarter-point Fed rate increases this year, in October and December, after September's unanimous 12-0 decision to reach 3.75%-4.00%.
• BofA economists noted that tightening cycles are typically front-loaded and that the Fed almost never stops after just one increase.
• Nominal consumer spending has climbed 6.3% year over year, well above the 5% pace that has historically coincided with above-target core inflation, so BofA sees little alternative to restraining demand.
• The bank argued that a strong nominal economy heightens the chance of persistent inflation while lowering the odds that hikes trigger a recession, although durable supply shocks could force a choice between an inflation overshoot and a hard landing.
• BofA's economists anticipate no policy shift in 2027. Two additional hikes would lift the target range to 4.25%-4.50%.
• BofA's rates strategists, a separate group, contend that the market underestimates the cycle's endpoint and see the policy rate moving above 5%.

Bank of America is maintaining its forecast for two more quarter-point Federal Reserve rate increases this year, scheduled for October and December, contending that robust spending gives the central bank scant room to pause. In a research note, BofA economists stated that tightening cycles are usually front-loaded and that the Fed almost never stops after a single rate rise, pointing to the quarter-point move to 3.75%-4.00% delivered on September 16 with a unanimous 12-0 vote.

The case hinges on nominal consumer spending, which is running 6.3% higher from a year earlier. BofA noted that this sits well above the 5% pace historically tied to above-target core inflation, and concluded that the Fed has little option but to cool demand. The bank's economists also said that a strong nominal economy raises the risk of inflation proving sticky while reducing the chance that hikes cause a downturn. Two more moves would bring the target range to 4.25%-4.50%, and BofA sees no policy adjustment in 2027.

The call aligns with signals from the central bank. The latest projections showed all but two policymakers expect at least one more quarter-point increase this year, and Fed Chairman Kevin Warsh estimated that inflation on the Fed's preferred gauge was around 3.6% in August. BofA's outlook goes beyond the projections, calling for two hikes rather than one. Reports indicated that markets were leaning toward a single additional move, most likely in December, though pricing varies across sources, and Goldman Sachs has suggested a hike could arrive as early as October.

BofA also acknowledged risks to its own forecast. If supply shocks persist, the Fed could eventually face a choice between a prolonged inflation overshoot and a hard landing. Meanwhile, BofA's rates strategists, a distinct team from its economists, argue that the market undervalues where the hiking cycle will end. They reference a Taylor rule measure indicating the funds rate should sit above 5% and expect two-year Treasury yields to climb to 5%.

Below is investingLive's take. The 5% threshold offers a clear gauge for BofA's forecast. If spending growth remains well above that level, the case for October and December stays intact, and if it slips back toward that mark or the energy shock moderates, the rationale for the second hike weakens. Minneapolis Fed President Neel Kashkari said on Sunday that inflation is too high across the economy and not confined to energy, a view consistent with BofA's stance, though it stops short of signalling any decision on the pace of increases.