Investing.com — Bank of America analysts outlined the potential conditions under which the Federal Reserve might pivot back to hiking interest rates following recent strong economic data that has halted the current rate-cutting cycle.
BofA’s Economics team stated that the Fed’s “cutting cycle is over” after stronger-than-expected December payroll figures prompted concerns about inflationary pressures.
The key question now is the threshold for future rate hikes.
According to the analysts, “the bar is high since the Fed still thinks rates are restrictive.”
However, they suggest that rate hikes could be back on the table if “year-over-year core PCE inflation exceeds 3%” or if “inflation expectations become unanchored.”
The impact of rising U.S. Treasury yields is also a point of focus. Since the end of September, 5-year UST yields have risen by 100 basis points, reflecting a robust U.S. economy and persistent inflation, which has kept the Fed on pause rather than cutting rates further.
BofA notes that while the elevated yields could slightly worsen credit quality, particularly concerning commercial real estate re-pricing, widespread credit deterioration is unlikely if the job market remains strong and GDP growth stays within the 2-3% range.
However, they believe the scenario changes if the Fed is compelled to resume hiking rates to combat inflation. In this case, BofA warns that investors may start pricing in a higher likelihood of a U.S. recession, which could negatively impact bank stocks due to expectations of rising credit defaults.
BofA advises focusing on the “three Rs”—Regulatory relief, Rate backdrop, and Rebounding customer activity—as drivers for bank stock performance in 2025.
They highlight Wells Fargo (NYSE:WFC) and JPMorgan as well-positioned among money centers, with Goldman Sachs and Morgan Stanley (NYSE:MS) offering exposure to a potential rebound in investment banking.