Oggonomics has maintained for months that the Federal Reserve’s interest rate stance of “higher for longer” is simply a delay rather than a change. The next directional 100 basis point move in Fed Funds has to be downward rather than upward. On top of the U.S. not being able to afford its annual debt servicing costs on top of runaway deficits, the financial markets have been trying to do some of the Fed’s work for it. Intermediate-term and longer-term Treasury markets, which are much more market-driven than the Fed’s short-term market targets, are already giving investors substantially lower yields versus the peak.
According to BofA Global Research, there is a change in BofA’s Fed forecast and a tweak in its recession risk. BofA is now forecasting an interest rate cut cycle that starts in September. This coincides with the CME FedWatch Tool, but where BofA’s forecast changes is that it sees the Federal Reserve cutting Fed Funds by 25 basis points “every quarter until a terminal of 3.25% to 3.5% in mid-2026.” Fed Funds are currently stuck in the range of 5.25% to 5.50%.
The median FedWatch Tool is for Fed Funds to be 3.00% to 3.25% with a 31.3% chance by September of 2025. Then again, there is nearly an equal chance of lower than higher — 21.5% probability of 2.75% to 3.00% and 24.9% probability of 3.25% to 3.50%. These are live market-driven forecasts, and the farther out you look the less historically accurate the probabilities have panned out.
According to BofA, the markets see U.S. recession risks rising and now expect more than 100 basis points of rate cuts before year-end. One thesis for BofA’s slower rate cut projection is the view that July employment data was weather-affected and that manufacturing in our services-led economy is just too small to invoke a recession. And while BofA sees recession-sized rate cuts as unlikely, the bank believes that the Federal Reserve could conclude that getting to a neutral rate environment more quickly balances risks better.
BofA’s Federal Reserve Watch report from August 5, 2024 says:
Incoming data have raised concerns that the US economy has hit an air pocket. Financial markets are now pricing in more than 100bp in rate cuts by year-end and significant probability of a 50bp cut in September. Markets even began discussing whether the Fed needs to deliver intermeeting cuts. A rate cut in September is now a virtual lock, but we do not think the economy needs aggressive, recession-sized cuts.
Investors should also refer back to a separate note from BofA calling the 12.4% drop in Japanese equities “surprisingly steep.” That may be an understatement considering its two-day drop has now been 17.6%. BofA pointed out that risk sentiment has rapidly deteriorated and the firm sees that Japanese stocks are now likely to be unstable over the next 2 month to 3 month period. The bank did have a “strategic” view in its report:
As long as the risk of a hard-landing for the US economy does not materialize, we believe today’s stock market rout will present opportunities to buy the dip.
BofA is also looking at the Japanese equity drop as a Black Monday event for how long it may take to recover. The report is dependent that the U.S. doesn’t enter a hard landing scenario. It said:
On anticipating future market trends, we believe Black Monday in 1987 could be a useful reference because the price movements are similar. After drops in the market, including this time, it often took 2-3 months to fully recover. We believe the next 2-3 months will see instability in the market, which could recover as early as October.
ALSO READ: FORGET THE FED, $3000 GOLD IS STILL COMING!
There are many interest rate forecasts out in the market. BofA’s is only one of those and Oggonomics always advises clients to never rely solely upon a single research call (or even a single firm) in your decision to buy or sell. Financial markets are driven by “live” money and data and it can be quite common for many unrelated reasons that a prediction one day looks drastically different just a few days later.
