Potential Federal Reserve Rate Hike Conditions

Analysts from Bank of America discussed the conditions under which the Federal Reserve may resume hiking interest rates, particularly after recent strong economic data that interrupted the current rate-cutting cycle.

BofA’s Economics team declared that the Fed’s “cutting cycle is over” following stronger-than-expected December payroll figures, which raised concerns about inflation.

Key Considerations for Future Rate Hikes

The primary inquiry is the threshold for future rate increases. BofA analysts noted that “the bar is high since the Fed still considers rates to be restrictive.” However, rate hikes could return if:
– Year-over-year core PCE inflation exceeds 3%.
– Inflation expectations become unanchored.

Rising U.S. Treasury Yields

The rise in U.S. Treasury yields is also significant. Since late September, 5-year UST yields have increased by 100 basis points, signaling a robust economy and persisting inflation, which has kept the Fed from further rate cuts.

BofA suggested that while elevated yields might slightly impact credit quality—especially regarding commercial real estate re-pricing—widespread deterioration seems unlikely as long as the job market remains strong and GDP growth stays between 2-3%.

However, if the Fed resumes rate hikes to tackle inflation, the outlook could shift. BofA warns that this could lead investors to foresee a higher chance of a U.S. recession, potentially impacting bank stocks due to expectations of increased credit defaults.

Investment Focus for 2025

BofA recommends concentrating on the “three Rs”—Regulatory relief, Rate backdrop, and Rebounding customer activity—to gauge bank stock performance in 2025. They emphasized that Wells Fargo (NYSE:WFC) and JPMorgan are well-positioned within the money center sector, while Goldman Sachs and Morgan Stanley (NYSE:MS) could benefit from a potential investment banking rebound.