The U.S. Federal Reserve may attempt to increase its policy rate above market’s consensus to nearly 6%, the Bank of America Global Research said, citing that strong U.S. consumer demand and tight labor market would put pressure on the central bank to extend its fight with inflation.
The figure estimated by BofA was much higher than a peak of 5.4% by September anticipated by the market.
The bank wrote in a note that aggregate demand needs to weaken significantly for inflation to return to the Fed’s target, which would be around 2%. Meanwhile, further supply-chain normalization and a slowdown in the labor market will help, but only to a certain level.
BofA also added that the processes are taking longer than the bank and markets anticipated.
The comment of the American bank came after it, along with other financial firms, recently added another 25 basis point rate hike in June after a quarter hike in March and May, taking the Fed’s terminal rate to 5.25%-5.5%.
The bank expected the U.S. economy to dip into recession by the third quarter of this year.
