Bank of America Fed Outlook Gets More Hawkish Amid Inflation Worries
Bank’s chief global economist forecasts seven rate rises over course of 2022, while trimming growth outlook for year
The central driver in the Fed’s policy outlook is inflation that is both higher and longer lasting than the central bank’s officials had expected. Above, the Federal Reserve building in Washington.PHOTO: JOSHUA ROBERTS/REUTERS
By
Michael S. Derby
Jan. 28, 2022 11:01 am ET
Bank of America has shifted its outlook for monetary policy in a decidedly hawkish direction and now sees more rate rises this year than even the most aggressive outlook held by a central banker.
The Fed is likely to raise its now near zero short-term interest rate target seven times over the course of this year, on its way to a stopping point of between 2.75% and 3%, wrote Ethan Harris, chief global economist for the bank.
“The Fed has all but admitted that it is behind the curve” when it comes to controlling inflation, and this monetary policy path “should affect the economy with a lag, weighing on 2023 growth,” Mr. Harris wrote. He said in his note he had trimmed his growth outlook for this year to a 3.6% increase, and he now sees inflation, stripped of food and energy costs, rising by 3%, from 2.6%, over 2022.
The Bank of America forecast for monetary policy compares with the central bank outlook released at its December meeting, which points to the possibility of three rate rises this year. A number of Fed officials have affirmed that they see three rate rises, although some officials, like St. Louis Fed leader James Bullard, reckons four rate rises could be appropriate, while Fed governor Christopher Waller said even more increases are on the table.
Also weighing in on Friday, Evercore ISI said data released Friday support an outlook of five rate rises, but there is a risk that it could do six or seven depending on how inflation performs.
The central driver in the Fed’s policy outlook is inflation that is both higher and longer lasting than the central bank’s officials had expected. The Fed’s concern about price pressures is such that it accelerated the end of its bond buying program, and at its Federal Open Market Committee meeting this week, the central bank strongly signaled it would raise rates in March.
On Friday, the government reported that the Fed’s preferred inflation barometer, the personal-consumption expenditures price index, hit a 5.8% overall rise in December, the highest level since the early 1980s, with prices stripped of food and energy factors up by 4.9%. Meanwhile, employers spent 4% more on wages and benefits last year, the biggest such gain since 2001.
“With both wage and underlying price inflation spiraling out of control, no wonder the Fed is a lot less confident that this surge will be short-lived,” said economists at Capital Economics, in a note to clients.
What happens after the likely March rate rise is unclear and will be driven by a hard-to-forecast outlook, Fed Chairman Jerome Powell said in a Wednesday press conference, held after the Fed meeting. He also noted the Fed can work to bring inflation under control without harming the labor market, saying “ there’s quite a bit of room to raise interest rates without threatening the labor market.”
Speaking during a National Public Radio interview Friday, Minneapolis Fed leader Neel Kashakri agreed there is a lot of uncertainty about the outlook, and while tighter monetary policy looms, it is really too soon to say how far the Fed will need to go.
“We think a lot of the reason that prices are high right now are temporary factors related to Covid” and the pandemic, he said on the radio program. Those disruptions could be resolved and take away the need for an aggressive path of action, but it is unclear how that will play out, he said.
But even in the face of that uncertainty, higher rates are probable. “The economy is doing well, fundamentally, but it’s a little bit imbalanced right now. And we need to bring it back into balance,” Mr. Kashkari said.
Exc. |
