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The Fed will focus on taming hot inflation as the strong labor market still points to a lower recession risk, BofA says

Federal Reserve Board Chair Jerome Powell.

Alex Brandon/AP Photo

  • The Fed will focus on taming hot inflation at the Federal Reserve’s meeting next week, BofA said in a Wednesday note.
  • Meanwhile, the strong labor market signals a lower recession risk, and the Fed will be less sensitive to any weakness there, analysts said.
  • “We expect the [Fed] to be less sensitive to drawdowns in activity or sluggishness in labor markets in the near term as it attempts to restore price stability.”

The Federal Reserve will remain focused on taming high inflation as the strong labor market keeps recession risks in check, according to Bank of America analysts. 

In a Wednesday note, BofA analysts led by Michael Gapen wrote that the US economy indeed remains overheated and predicted the Fed will hike rates by 75 basis points at its policy meeting next week. 

“We expect the [Fed] to be less sensitive to drawdowns in activity or sluggishness in labor markets in the near term as it attempts to restore price stability,” BofA said.

With June’s consumer price index showing annual growth of 9.1%, well above expectations, inflation will remain the priority for the Fed, BofA said. 

In fact, the robust job market will continue to add inflationary pressure on the economy, and there is little indication of a slowdown in employment, analysts added.

For now, BofA’s base case scenario remains a soft landing, although a recession cannot be fully ruled out. 

“Solid employment data points to solid underlying momentum in the economy, which, all else equal, reduces recession risks,” BofA said. “However, strong labor market data could fuel additional inflationary pressures and, in turn, will bring additional monetary tightening.”

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