If you figured the Fed was close to done, BofA's rates crew is not convinced. Strategists Mark Cabana and Meghan Swiber say traders are still underestimating where this tightening phase could land. They flag the chance that overnight borrowing costs climb back above 5%, potentially retesting the 2022 to 2023 peak when the target touched 5.5%.
Their read leans on a few signposts. The latest projections from the Fed show policymakers see far more risk that inflation runs hot than that unemployment jumps. On top of that, a Taylor rule gauge points to something near 5.3% for the policy rate. In their words, "Simple frameworks suggest Fed funds should be greater than 5%."
Chairman Kevin Warsh's comment that Wednesday's move removed a "dose of accommodation" was telling for this team. To them, that signals officials do not yet see policy as putting the brakes on growth. As they wrote, "A Fed that does not view policy as restrictive is likely to keep hiking until financial conditions become restrictive, strengthening our conviction in a flatter yield curve."
Warsh avoided promising any specific next step, but he did reiterate frustration with the current inflation trajectory and the Fed's commitment to price stability. Recently the yield curve has flattened, with shorter maturities climbing more than longer ones as traders add to wagers on more hikes.
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Swaps imply three more quarter-point hikes, putting the effective fed funds rate between 4.5% and 4.75%. BofA thinks the overnight rate could still need to go higher than that. With that setup, they want clients leaning into the front end. They expect the two-year yield to reach 5% this year and advise short positions in two-year Treasurys with a 5.25% yield target, which is near the 2023 high.
They also see limited follow through at the long end. "While front-end yields can continue to rise, we expect a more limited pass-through to longer tenors," they wrote, projecting the 10-year to end the year near 5%, close to where it traded on Monday.
These strategists focus on bond markets and trade ideas, and they operate separately from Bank of America's economists, who cover the Fed. A Wednesday note from BofA's US economist Aditya Bhave says his team still anticipates two more rate hikes coming in October and December, and projects zero policy moves in 2027.
For your money, the punchline is practical: if short yields push back toward 5%, cash-like accounts may throw off more income, while the front end gets more rate sensitive. If the curve keeps flattening, there may be less movement further out. Balancing near-term yield with how much rate risk you want to carry becomes the key question into year end.
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