BofA now predicts a fed rate cut of 125 BPS for 2025 and another 75 BPS during the fourth quarter of this year.
In a recent analysis, Bank of America (BofA) examined the Federal Reserve’s 50 basis points (bps) rate cut, characterizing it as a “recalibration” of monetary policy rather than the beginning of a more aggressive rate-cutting cycle.
Despite the Fed’s optimistic outlook, BofA expressed doubts about the effectiveness of these measures, predicting deeper cuts ahead.
The bank forecasts an additional 75 bps reduction in the fourth quarter of this year and 125 bps in 2025.
BofA noted that the Fed’s messaging, particularly in Chair Jerome Powell’s comments and the dot plot, was unexpectedly hawkish despite the recent rate cut.
Powell clarified that the cut was not prompted by labor market concerns but was intended to adjust rates closer to neutral.
The Fed’s Summary of Economic Projections (SEP) maintained a positive outlook, projecting stable growth and a quicker decline in inflation.
The Federal Open Market Committee (FOMC) statement contained significant updates, but they did not align with a dovish interpretation of the rate cut.
BofA highlighted the Fed’s confidence in meeting its inflation targets and remarked that the risks related to inflation and employment were deemed “roughly in balance.”
Notably, the statement included a commitment to “maximum employment,” marking a shift in communication.
Governor Michelle Bowman dissented from the decision, the first such dissent since 2005, indicating some internal disagreement within the Fed.
The SEP released alongside the rate decision was notably optimistic, predicting above-trend growth and a faster path to lower inflation.
While the Fed raised its unemployment forecast to 4.4%, this was viewed as a reflection of current conditions rather than a significant change in outlook.
However, the Fed’s dot plot raised concerns, showing a median forecast of just 100 bps of cuts in 2024, with nearly half the committee anticipating only a 25 bps cut later this year.
BofA suggested this hawkish view could undermine the Fed’s credibility, especially since pre-meeting communications had hinted at a smaller cut.
This divergence may leave the Fed susceptible to market pressures for further reductions.
BofA believes the labor market is likely to remain weak, compelling the Fed to implement a substantial cut in the fourth quarter.
The bank predicts an additional 75 bps cut in 2024 and 125 bps in 2025, leading to a terminal rate of 2.75-3%.
Following the Fed meeting, long-term yields rose slightly, indicating that the central bank’s “recalibration” may not have achieved its intended impact.
BofA concluded that unless economic data consistently shows strength, the Fed may need to abandon its hawkish stance and consider further cuts.
Also Read: The US Treasury Direct is Now Freezing Customer Accounts
Other US Bank News Today
A massive US bank now gets hit with an AML investigation over flaws related to its internal controls and crimes risk management.
The Office of the Comptroller of the Currency (OCC) has taken enforcement action against Wells Fargo, raising concerns about the bank’s anti-money laundering (AML) controls and financial crimes risk management.
This development could impact the potential lifting of Wells Fargo’s asset cap and might signal increased scrutiny for other major banks.
On Thursday, the OCC announced it found several deficiencies in Wells Fargo’s AML practices, including issues with suspicious activity reporting, customer due diligence, and customer identification protocols.
The regulatory agreement mandates that Wells enhance its AML and sanctions risk management, secure OCC approval for new offerings, and notify the agency before expanding certain services.
Wells Fargo stated it is already addressing many of the requirements outlined in the agreement and is committed to resolving them with urgency.
Analyst Scott Siefers from Piper Sandler noted that while the formal action was anticipated, it still represents a setback in the bank’s progress to resolve regulatory issues.
Wells Fargo has been under the regulatory microscope since the fallout from its 2016 fake accounts scandal.
Currently, the bank operates under a $1.95 trillion asset cap imposed by the Federal Reserve, one of nine consent orders against it, though six have been lifted since Charlie Scharf became CEO.
The OCC’s 26-page agreement, which did not impose any fines, requires Wells to improve its internal controls and reporting mechanisms related to AML and sanctions practices.
The bank must also enhance its audit program and ensure data integrity for compliance systems.
Jefferies analyst Ken Usdin noted that the broad requirements could impact Wells Fargo’s future growth strategy, but the practical implications remain unclear.
Despite the seriousness of AML issues, Royal Bank of Canada analyst Gerard Cassidy believes this enforcement action will not hinder efforts to lift the asset cap, as it primarily addresses past consumer banking problems.
Wells Fargo has invested significantly in its risk and control operations, hiring around 10,000 employees and increasing spending by $2.5 billion annually since 2018.
This suggests the new regulatory action may not drastically alter overall costs.
Other major banks have also faced scrutiny regarding their AML and sanctions programs.
Bank of America and Citi have highlighted related risks in their recent filings, while JPMorgan Chase continues to disclose ongoing investigations from a 2019 money-laundering incident in India.
Additionally, Canadian lender TD is under investigation for its U.S. AML program related to drug trafficking allegations.
As the financial landscape evolves, the potential for similar enforcement actions against other banks remains uncertain, leaving the industry on alert.
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