Sep 13, 2022
BofA’s Cabana Says Fed Likely to Overdo It and Cause a Recession
, Bloomberg News
(Bloomberg) -- Bank of America Corp.’s Mark Cabana said the Federal Reserve is so intent on stopping inflation it will likely raise rates until the US economy is in a recession.
His remarks were made even before data showing US inflation topped forecasts, with the swaps market moving quickly to fully price in a 75-basis-point hike by the Fed on Sept. 21. The implied rate for where the tightening cycle will top out next year leaped to about 4.3%.
“The Fed is probably going to overdo it,” the global head of US rates strategy at BofA, told Bloomberg Television Tuesday. “We have seen them turn very hawkish with the labor-market strength. We think that the Fed will try and stick to this higher-for-longer mantra. That’s probably going to result in a recession.”
Read: Traders Start to Consider Even Bigger Fed Hikes After Hot CPI
Cabana spoke less than an hour before a government report showed the consumer price index increased 0.1% from July, after no change in the prior month. From a year earlier, prices climbed 8.3% in August, a slight deceleration, largely due to recent declines in gasoline prices. So-called core CPI, which strips out food and energy, also topped forecasts.
The report sent stocks tumbling Tuesday, with the S&P 500 extending this year’s losses to 16%. Treasury yields jumped across the curve, with the two-year rate soaring as much as 18 basis points to about 3.75% -- the highest since 2007.
In recent days, equities had been rising and bond yields had steadied in anticipation of evidence that inflation was moderating.
“The Fed probably won’t trust that until they see the labor market soften more meaningfully,” Cabana said. “It certainly seems like the Fed is dead-set on ensuring that they get that labor market slowdown.”
Fed Chair Jerome Powell and other officials have said the bank is committed to its goal of cutting inflation down to 2% over time. Cabana provided a warning to investors on that point.
“I do worry that this is a Fed that wants to see even more tightening of financial conditions in order to have faith that they will be able to achieve their 2% inflation target,” he said. The risks are skewed in the Fed continuing to sound hawkish, with that being be “a headwind for risk assets,” Cabana added.
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