- The Federal Reserve's ability to stick a soft landing in the economy appears more unlikely, according to Bank of America.
- The bank highlighted Powell's commitment to getting inflation back to the 2% range, which will require a lot more financial tightening.
- "Powell's strong focus on the inflation mandate supports our forecast that the economy will go into recession in the second half of this year," BofA said.
The Federal Reserve is walking a tight rope in its ongoing attempt to bring down inflation without sending the economy into a recession, and Bank of America expects the balancing act to ultimately fail by the end of the year.
Fed Chairman Jerome Powell raised interest rates by 75 basis points at its meeting on Wednesday, bringing the effective federal funds rate to a range of 2.25% to 2.50%. The stock market moved higher on Wednesday, as investors cheered Powell's comments that future rate hikes would solely be dependent on economic data.
But that data isn't looking to hot, as inflation remains at elevated levels while consumer spending begins to show signs of slowing. The Fed's statement suggested that they "will look through the slowdown in the data in the near term because job growth has been 'robust' and inflation 'remains elevated," Bank of America said.
That means the Fed is likely to continue its rate hiking trajectory into year-end, with BofA expecting Powell to raise rates by another 50 basis points in September, and by another 25 basis points at its November and December meetings. That would bring the fed funds rate to an effective range of 3.25% to 3.50% by year-end.
From there, BofA expects the Fed to pause in its interest rate hikes to see how the economy has adapted to the new interest rate environment.
"Chair Powell's emphasis on returning inflation to 2% is significant. It suggests the Fed has a high pain threshold to get inflation back to target. This is consistent with his hesitance to say that the economy will not go into recession, and his statement that the risk of tightening too much in the short run is less than risk of tightening too little," BofA said.
Ultimately, it all chalks up to the likelihood that the US economy will avoid a soft-landing and enter a recession by year-end.
"Powell's strong focus on the inflation mandate therefore supports our forecast that the economy will in fact go into recession in the second half of this year. There is still a path to a soft landing, but it is too narrow to be our base case," BofA said.
In fact, the US economy could already be in a recession based on recent economic data. US GDP growth fell 0.9% in the second quarter, after falling 1.6% in the first quarter of 2022.
A recession is typically defined as two consecutive quarters of negative GDP growth, though the official call is ultimately made by the National Bureau of Economic Recession, which takes into account other economic data in its call.