New York's Wall Street on Guard Against Possible Further Rate Hikes... BofA Strategy Team Warns Rates Could Exceed 5%

[Financial News] Wall Street in New York is preparing for the possibility of further benchmark rate hikes this year as it watches the moves of the U.S. central bank, the Federal Reserve System (Fed), which raised rates last week.
Bank of America (BoA) strategists have warned that the Fed could raise rates above 5%, potentially recreating the situation seen in 2022.
On the 20th, local time, Michael Goosay, chief investment officer for global fixed income at Principal Asset Management, told Yahoo Finance in an interview, "This rate hike may not be limited to one or two increases." He added, "If the Fed is seeking to suppress demand decisively to bring inflation under control, measures much more aggressive than expected could follow."
After the Fed unanimously decided to raise rates last week, market participants have priced in a more than 50% chance of another hike next month. The Fed's dot plot also indicated that rates could rise once more this year.
In a report released on the 16th, Goldman Sachs' economics team said, "We have revised our previous forecast that the September hike would be the last and expect the Fed to deliver an additional 0.25-percentage-point increase at its next move." Goldman Sachs cited the unanimous support from Fed officials and Fed Chair Kevin Warsh's description of the hike as "a partial withdrawal of monetary accommodation," concluding that "the Fed's committee was far more hawkish (favoring monetary tightening) than expected."
Veteran market strategist Ed Yardeni, president of Yardeni Research, also expects multiple rate hikes this year and has revised his stock-market outlook. He lowered his year-end target for the S&P 500 Index from 8,400 to 7,900. Yardeni said, "There is a risk that prolonged high oil prices will continue to push bond yields higher," and assessed that the Fed's rate hike after last week's monetary policy meeting marked the start of a hiking cycle. He warned, "The longer the rise in oil prices continues, the greater the risk that inflation will become entrenched alongside a strong economic recovery."
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said the Fed viewed rising prices as a very serious issue. In an interview with Fox News, Kashkari stressed that U.S. inflation had reached a level high enough to require the Fed to act to curb prices. He said inflation remained elevated even after excluding volatile energy and food prices, adding, "The Fed's role is to lower the inflation rate to its 2% target."
Kashkari emphasized that price increases were broad-based in the U.S. services sector but said the Fed had the tools to bring them down. He voted in favor of a rate hike at the Federal Open Market Committee (FOMC) meeting that ended on the 16th.
Bank of America's equity strategist Savita Subramanian also said, "We are entering a seasonally weak period for stocks, and it is time for a market correction," forecasting that a more favorable buying opportunity would emerge. Expecting the Fed to deliver a total of three rate hikes this year, BofA slightly raised its year-end S&P 500 Index target to 7,400, about 3% below its current level.
BofA strategists urged investors to prepare for the risk that the Fed could raise rates above 5%.
The BofA strategy team led by Mark Cabana and Megan Swiber said investors were underestimating the eventual level of the Fed's rate hikes and recommended preparing for an increase in two-year Treasury yields.
While the current interest-rate swap market expects the Fed to raise rates three more times, taking the effective federal funds rate to 4.5% to 4.75%, BofA sees a possibility that rates could exceed 5%, as they did during the 2022-23 hiking cycle. At that time, the Fed raised rates to 5.5% in 11 moves from March 2022, the month after the outbreak of the war in Ukraine, through July 2023.
Unlike strategists focused on the bond market, BofA economists focused on the Fed said in a note released on the 16th that they expect the Fed to raise rates further in October and December and hold them steady next year.
[email protected] Yoon Jae-jun Reporter