Bank of America CEO stated that the U.S. economy will not "land", and the Federal Reserve will maintain a hawkish stance for a longer period. It is expected that the Federal Reserve will cut interest rates by another 50 basis points before the end of the year, followed by four 25 basis points rate cuts in 2025, ultimately bringing the interest rate down to 3.25%
Bank of America CEO suggests that the Federal Reserve should not "overdo" rate cuts and predicts that the terminal rate will be around 3.25%.
In an interview with Bloomberg on Wednesday, Bank of America CEO Brian Moynihan warned the Federal Reserve:
"The Fed has been slow to act in raising borrowing costs in 2022, so now it must avoid being too aggressive in cutting rates."
Fed officials are facing the risk of "cutting too quickly or too slowly," and this risk is higher now than it was six months ago.
At 65, Moynihan is one of the longest-serving CEOs among the top U.S. banks, and he has indicated his intention to continue as CEO in the coming years. Since the recovery of Wall Street from the subprime crisis in 2010, Moynihan has been promoted to CEO and has led the bank through the Credit Suisse crisis and the Silicon Valley banking crisis.
Moynihan stated in last week's earnings call that he expects the U.S. economy to "not land," meaning that economic growth will remain strong, forcing the central bank to maintain a hawkish stance against inflation for a longer period. He emphasized this point on Wednesday:
"With a 4% unemployment rate and 5% wage growth rate, economists find it hard to convince the world that an economic recession will occur."
"It is expected that the Fed will cut rates by another 50 basis points by the end of the year, then make four 25 basis points cuts in 2025, ultimately bringing rates down to 3.25%."
In this scenario, it is expected that the inflation rate will drop to 2.3% in 2025 and 2026.
Currently, investors have lowered their expectations for rapid rate cuts in the U.S., with some Fed officials indicating a preference for a slower pace of rate cuts after the first cut since 2020 last month. Meanwhile, there are signs that the U.S. economy remains strong.
It is worth noting that a longer period of high interest rate policy will be a boon for banks. In this environment, banks are usually able to price larger interest rate spreads on their loan books. Moynihan stated:
"A year-end rate of around 3% will 'make the interest rate environment in the U.S. and other markets completely different from the past fifteen years,' which is a better position for the banking industry. Bank of America's net interest margin - a key measure of the difference between loan rates and deposit rates - is expected to expand to 2.3% over an extended period."