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Bank of America has warned that the Federal Reserve will have to keep raising interest rates until it finds \u201cthe point of pain for consumer demand.\u201d Expecting a slowdown in consumer demand to \u201clead to an outright recession,\u201d the bank\u2019s economist cautioned that \u201cadditional Fed hikes would also mean more pain for the interest-sensitive non-consumer sectors such as housing.\u201d<\/strong><\/p>\n Bank of America senior economist Aditya Bhave published a note earlier this week warning that the Federal Reserve could increase interest rates beyond the market\u2019s expectations to bring inflation down to its 2% target. According to a memo seen<\/a> by Fortune, the bank wrote:<\/p>\n The Fed will have to keep raising rates until it finds the point of pain for consumer demand.<\/p>\n<\/blockquote>\n Bank of America added that at this stage, 25-basis-point interest rate hikes in the upcoming Federal Open Market Committee (FOMC) meetings in March and May \u201clook extremely likely.\u201d The economist also pointed out that Bank of America recently changed<\/a> its Fed forecast to include an additional 25-basis-point interest rate hike in June. Bhave continued:<\/p>\n The resilience of demand-driven inflation means the Fed might have to raise rates closer to 6% to get inflation back to target.<\/p>\n<\/blockquote>\n Several other economists have cautioned that the Fed cannot reach its 2% inflation target without \u201ccrushing the economy,\u201d including Allianz chief economist Mohamed El-Erian, who believes that \u201c2% is not the right target<\/a>.\u201d<\/p>\n Earlier this week, U.S. Treasury Secretary Janet Yellen said that \u201cdisinflation is not a straight line.\u201d While stating that \u201cthere\u2019s more work to be done\u201d given that \u201ccore inflation still remains at a level that\u2019s above what\u2019s consistent with the Fed\u2019s objective,\u201d the treasury secretary dismissed the idea that a recession is inevitable.<\/p>\n Commenting on Yellen\u2019s statements, the Bank of America senior economist stressed that \u201ca recession appears more likely than a soft landing.\u201d Bhaves opined:<\/p>\n A slowdown in consumer demand, which our analysis suggests is necessary to bring inflation back to target, would likely lead to an outright recession.<\/p>\n<\/blockquote>\n \u201cConsumer spending makes up 68% of GDP, and additional Fed hikes would also mean more pain for the interest-sensitive non-consumer sectors such as housing,\u201d the Bank of America economist described. \u201cOur base case is that a recession will start in Q3 2023. Risks are skewed towards an extended period of consumer resilience, stickier inflation, and more Fed hikes. Either way, however, the lesson for investors is: No pain, no gain.\u201d<\/p>\n Several Fed officials have already said that more rate hikes are needed to bring inflation under control. Earlier this week, Federal Reserve Bank of Atlanta President Raphael Bostic warned about \u201cdisastrous<\/a>\u201d economic consequences if the Fed loosens its policy prematurely. Meanwhile, billionaire \u201cbond king\u201d Jeffrey Gundlach predicted \u201cpainful outcomes<\/a>\u201d in the next recession while economist Peter Schiff cautioned that the Fed could be fighting a \u201ccomplete economic collapse<\/a>.\u201d<\/p>\nBank of America\u2019s Economic Warning<\/h2>\n
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