ICYMI: BofA keeps call for Fed hikes in October and December as spending runs hot
At a Glance
The desk echoes Bank of America's bullish stance on the Federal Reserve's tightening cycle, anticipating two additional rate hikes in October and December. Per the full note from BofA, these hikes are largely informed by robust nominal consumer spending, which rose by 6.3% year-on-year, significantly above the historical 5% threshold that correlates with heightened inflation risks. The outlook suggests a firm US dollar is likely amid a more aggressive interest rate path, impacting not only FX traders but also the broader equity markets focused on rate-sensitive assets.
Key Takeaways
Full Analysis
What the desk is arguing
The desk strongly supports Bank of America's expectation of two more Fed interest rate hikes before the year ends. According to BofA, the Fed is unlikely to pause after one increase, particularly as nominal spending supports market inflationary pressures. This perspective was detailed in their latest research published by Eamonn Sheridan which highlights expected hikes maintaining upward pressure on front-end yields and the dollar's strength.
Supporting this view, BofA identified that increases in nominal consumer spending beyond the historical trend are likely necessitating further action from the Fed in light of persistent inflation. The current tightening cycle's front-loading is underscored by the expectation that the Fed seldom stops at a single hike, setting a precedent for upcoming meetings.
An alternative perspective would suggest that if the Fed opts to maintain its current stance in the October meeting, it could challenge the market's rate hike trajectory and diminish the dollar's recent gains, recalibrating trader expectations accordingly.
Where it sits in our coverage
Our consensus target for the USD against the EUR is 1.075, with a range of 1.04 to 1.12. In the current landscape, bofa has a contrary view with a target of 1.04 for March 2026, while jpmorgan aligns with our outlook, forecasting 1.10 for the same tenor.
This desk's analysis reinforces the upper bound of the prevailing sentiment, particularly as BofA advocates for a short-term hawkish stance that could lend strength to the dollar, differing from firms projecting a weaker dollar outlook.
How other firms see it
While jpmorgan aligns with our raised forecast, bofa presents a contrary position advocating for a softer dollar given their expectations of less aggressive Fed action. Their outlook highlights a crucial divergence in monetary policy expectations that could influence currency movements.
Monitoring the USD/EUR exchange rate remains essential for traders, especially as it correlates with projected moves from the Fed where the upcoming fiscal dynamics are likely to culminate.
Market Implications
Traders should watch the upcoming Fed meeting in October closely, as a hike would affirm the strong dollar outlook. Additionally, maintaining a lookout for changes in consumer spending data will be crucial to gauge inflation pressures.
From the original
Front-end Treasury yields are the cleanest expression of this view, since two more hikes would keep pressure on two-year yields, and BofA's rates strategists already lean that way. A firmer rate path supports the dollar, which rose this week by the most in three months, and adds
Related speeches
4 itemsSignals & Noise: Our case for 3 rate hikes this year
The desk supports the view of three additional 25bp Fed rate hikes in the coming months, as articulated by Aditya Bhave from BofA Global Research. The rationale hinges on persistent labor market strength and elevated core inflation figures, which suggest that current monetary policy remains excessively accommodative. Per the full note [source], emerging concerns about the softness in CPI data have not deterred BofA from maintaining this hawkish outlook. This position indicates potential upward pressure on the USD as the market begins to price in a firmer trajectory for interest rates amidst skewed inflation fears.
US Rates: Life, Liberty, and the pursuit of hawkishness
The desk anticipates that the Federal Reserve's commitment to a hawkish stance will continue to shape the U.S. interest rate landscape, potentially leading to upward pressures on yields and, by extension, on the dollar's performance. Per the full note from J.P. Morgan, strategists highlight lessons learned from past mid-cycle hiking phases, indicating that past behavior can provide a framework for understanding current conditions. The current rate forecast underscores ongoing concerns about inflation that may prompt the Fed to extend its tightening cycle beyond market expectations. This aligns with data indicating that inflation remains persistently high, evidenced by the latest CPI readings remaining above the Fed's target, which argues in favor of sustained hawkishness in U.S. monetary policy.
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