Investing.com -- The Federal Reserve’s rate-cutting cycle appears to be over, and maintaining current rates may be the best way to avoid future hikes, according to Bank of America economist Aditya Bhave.
“The best way to not hike is to not cut,” Bhave wrote, emphasizing that the recent pickup in inflation supports a more cautious approach from the Fed.
Bhave pushed back against arguments that January’s inflation data should be dismissed due to residual seasonality.
Instead, he pointed to “growing evidence of a higher r*,” or neutral interest rate, as a reason for the Fed to hold off on cuts.
The latest consumer and producer price index readings were stronger than expected, leading BofA to forecast a 0.3% month-over-month increase in both core and headline personal consumption expenditures (PCE) inflation for January.
“Core PCE should rise by 2.6% y/y,” Bhave noted, adding that inflation remains above the Fed’s target.
The upcoming Federal Open Market Committee (FOMC) minutes could provide insight into policymakers’ stance on future rate cuts.
According to Bhave, key questions include “to what extent do policymakers retain a cutting bias?” and whether they are becoming more comfortable with the idea that “the cutting cycle is over.”
Additionally, any discussion of former President Donald Trump’s policy agenda could shed light on the Fed’s future approach, according to BofA.
On the consumer front, January retail sales were likely weighed down by severe weather events, including snowstorms, wildfires, and a polar vortex.
However, Bhave maintained a positive outlook on the consumer, noting that “as long as the labor market continues to generate solid real income growth and HH balance sheets stay healthy,” consumer spending should remain resilient.