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Federal Reserve to take back rate cuts
The Federal Reserve is offside and will likely implement three rate hikes to reverse last year's risk-management cuts, as argued by Aditya Bhave of Bank of America.
The argument
Bhave argued that the unemployment rate is unchanged from a year ago while core PCE inflation is roughly 60 basis points higher, meaning policy is 75 basis points too easy. Furthermore, the Summary of Economic Projections (SEP) showed nine officials expecting hikes despite no one forecasting a rise in unemployment, signaling a hawkish shift in the reaction function.
The thesis, stress-tested
✓ What validates it
- ✓Core PCE inflation remaining sticky or accelerating in upcoming prints
- ✓Fed dot plot or official statements shifting explicitly toward tightening
▸ Risks discussed
- ▸Supply-driven inflation could remain structurally sticky for 5 to 10 years
- ▸Political pressure on the Fed Chairman to lower rates
Hear it yourself
"For us, it's the data and the reaction function data. The unemployment rate is unchanged from a year ago. Core PC inflation is about sixty basis points above where it was a year ago, and only some of that is one off. So despite all this policies, seventy five basis points easier than last year."
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