Why the Fed may still need to hike rates

Investing.com -- In a note to clients on Friday, Bank of America argued that the case for Federal Reserve rate hikes remains strong despite some clients' skepticism, pushing back on arguments that inflation is being driven by one-off factors.

Analyst Aditya Bhave wrote that "per our math, underlying inflation is well above target," countering claims that transitory factors are behind recent price pressures.

The firm also addressed speculation that Fed Chair Warsh might use recently formed task forces as a reason to avoid hiking, arguing instead that "he has strategic reasons to hike soon: he'd gain credibility without having to own the inflation problem."

Bhave noted that with markets already pricing in nearly 40 basis points of hikes, "it would take at least 75bp to deliver meaningful financial tightening."

On inflation data, BofA said June CPI came in softer than expected, with headline inflation down 0.4% month-over-month and core inflation falling for only the seventh time since 1985.

The firm lowered its core PCE tracking to 0.15% month-over-month, though the year-over-year rate should remain at 3.3%. BofA believes this "reduce[s] pressure on the Fed to hike in July," but maintained that inflation "remains well above target."

On retail sales, BofA mentioned that June figures were in line with consensus but softer than its own forecast, with nonstore retailers providing a key source of strength.

Reviewing Warsh's recent testimony, BofA highlighted that it "didn't break new ground," noting he remained focused on restoring price stability while offering an optimistic view on productivity growth, with nothing suggesting the task forces would delay policy tightening.

You May Also Be Interested In

• Magnitude 7.4 earthquake strikes coast of Chiapas, Mexico; Tsunami waves are possible
• Meta Platforms (META) call put ratio 1.6 calls to 1 put as share price down 5.2%
• Kimi K3 AI breakthrough: What Wall Street analysts say about China’s OpenAI threat