Bank of America Analysts on Federal Reserve Rate Hikes

Bank of America analysts have outlined conditions under which the Federal Reserve might consider raising interest rates again after strong economic data halted the current rate-cutting cycle.

Current Economic Context

The BofA Economics team stated that the Fed’s “cutting cycle is over” following stronger-than-expected December payroll figures which raised concerns over inflationary pressures.

Future Rate Hike Thresholds

The significant question now is the threshold for potential future rate hikes. According to analysts, the bar is high as the Fed still perceives rates as restrictive. However, they suggest rate hikes could be considered if:
– Year-over-year core PCE inflation exceeds 3%
– Inflation expectations become unanchored

Impact of Rising Treasury Yields

Rising U.S. Treasury yields have been a focal point; since late September, 5-year UST yields have increased by 100 basis points, reflecting a robust U.S. economy and ongoing inflation, leading the Fed to pause rather than cut rates further.

Credit Quality Concerns

While elevated Treasury yields may slightly worsen credit quality, especially in commercial real estate, widespread credit deterioration seems unlikely if the job market remains strong and GDP growth is around 2-3%.

Risks of Resuming Rate Hikes

BofA warns that should the Fed resume rate hikes to control inflation, investors might start factoring in a higher chance of a U.S. recession, adversely affecting bank stocks due to rising credit default expectations.

Strategic Focus for Investors

BofA recommends focusing on the “three Rs”—Regulatory relief, Rate backdrop, and Rebounding customer activity—as key drivers of bank stock performance in 2025. They see Wells Fargo and JPMorgan as strong candidates among money centers, while Goldman Sachs and Morgan Stanley offer exposure to a potential rebound in investment banking.