The Fed is most likely done says BofA after ‘benign’ CPI report

Bank of America economists believe the U.S. Federal Reserve likely won’t have to raise interest rates again after a softer-than-expected CPI report for October.

Both headline and core CPI were below projections. Headline CPI showed minimal change on the month, increasing by 0.04% (unrounded). Consequently, the year-on-year rate declined by five-tenths to 3.2%, marking its lowest level since June 2023. The three-month annualized rate also decreased from 4.9% to 4.4%.

Core inflation, excluding volatile food and energy prices, rose by 0.2% month-on-month (0.23% unrounded), falling short of consensus expectations for a 0.3% increase. This led to the year-on-year rate dropping by two-tenths to 4.0%. However, the three-month annualized rate increased from 3.1% to 3.4%.

BofA’s analysts argue the Fed is “most likely done” with raising rates.

“[The] benign CPI report suggests that the upside surprise in September was a blip. The Fed should be encouraged by the details of today’s print, specifically the drop in OER inflation and the significant cooldown in core services excluding housing,” the analysts wrote.

“We now think that the hiking cycle is over.”

“The Fed will probably try to leave the door open for more hikes next year at its December meeting, but there are diminishing returns to hawkish rhetoric when its policy choices lean dovish. We think that it would take meaningful re-acceleration in inflation for the Fed to hike next year. That is not our base case,” they added.

BofA sees the Fed starting to cut rates in June 2024 with one cut per quarter.