BofA expects the Fed to start cutting in December:
- Persistent Inflation: Inflation is expected to remain above the Fed's 2% target until 2026 due to strong labor demand and increased consumer spending.
- Gradual Rate Cuts: The Fed is expected to start easing rates in December 2024, with cuts continuing quarterly to a terminal rate of 3.5-3.75% by 2026.
- Risk of Sticky Inflation: A key risk identified is that inflation might remain sticky, necessitating the Fed to keep rates higher for longer than anticipate
Possible Implications:
- Fixed income: The higher-for-longer interest rate environment implies a challenging period for bond prices, which typically inversely correlate with interest rates.
- US Dollar: Higher rates in the US compared to other economies will likely keep the dollar strong. Geopolitical risks and economic uncertainties in other regions (e.g., Europe and China) contribute to the dollar's strength as a safe-haven currency.