According to Bank of America’s top economist, the Federal Reserve waited too long to fight inflation and now risks dragging the economy into recession. On the heels of the central bank’s 75 basis point increase on Wednesday, BofA global economist Ethan Harris said the Fed was being forced into such aggressive moves by inflation which is now at its highest since late 1981. running at high speed. “Our worst fears surrounding the Fed have been confirmed: They fell behind the curve and are now playing a dangerous game of catch up,” Harris said in a client note on Friday. “We see GDP growth at nearly zero, inflation at around 3% and the Fed to raise rates above 4%.” Harris isn’t predicting a recession yet, but he said the odds of one happening in 2023 have risen to 40%. GDP declined 1.5% in the first quarter, and the Atlanta Fed expects the second quarter to be flat. Successive quarters of negative growth are considered the rule of thumb for recessions, although the National Bureau of Economic Research says it also uses other factors before making an official announcement. Along with the rate hike, Fed officials indicated that the benchmark funds rate would end the year around 3.4%, a 1.5 percentage point increase from the March outlook. Policymakers still see GDP growth of around 1.7% this year, but that would be a substantial drop from the 5.7% pace of 2021. Harris said a similar scenario has emerged from the warnings the bank issued more than a year ago. “In the spring of 2021 we argued that the biggest risk to the US economy was a boom-bust scenario. We worried that the Fed would take too long to brake,” he said. “We asked, if fiscal officials are doing so much stimulus why does the Fed need to add fuel to the fire with this unusually late policy normalization? The boom-bust scenario has become our baseline forecast over time.” In November, Harris said, he wondered “whether the Fed will ever be serious about fighting inflation.” Separate releases on Friday reaffirmed the Fed’s verbal commitment to battle rising prices. Chairman Jerome Powell promised the Fed is “intensely focused” on inflation, while a Fed report to Congress on monetary policy said the outlook would be “unconditional.” While Harris said the Fed has better positioned itself with rate hikes, he thinks it has to go beyond the “dot plot” of individual members’ expectations. The plot points to an average expectation of a 3.8% funds rate by the end of 2023, but BofA is looking for more than 4%. Five of 18 Fed officials in this week’s dot plot indicated a rate above 4%. The chart then indicates one or two rate cuts in 2024 to return the funds rate to 3.4%, before settling on a longer rate of 2.5%. “Where we disagree with both the Fed and the market is the idea that the Fed will cut back in 2024,” Harris wrote. “It is certainly possible if there is an outright recession. However, our baseline forecast assumes the Fed will be like a deer in the headlights: very weak growth or still unsure about how to react to high inflation.”
Bank of America economist says ‘their worst fears around the Fed have been confirmed’