The non-farm payroll data released last Friday was unexpectedly strong, reigniting inflation concerns. Has the outlook for the Federal Reserve's interest rate cuts been reversed?
Recently, multiple teams at Bank of America have released their latest research reports, providing insights into the Federal Reserve's monetary policy path for this year.
The economic team led by Bank of America analyst Aditya Bhave believes that the December non-farm data indicates the end of the Federal Reserve's rate-cutting cycle. Considering that current inflation remains above target and has upward risks, while the labor market shows signs of stabilization, this may open the door for the Federal Reserve to shift towards raising interest rates.
The banking team led by analyst Ebrahim H. Poonawala at Bank of America expects that the interest rate outlook remains unclear, and the yield on 10-year U.S. Treasury bonds may continue to rise towards nearly 5%.
As the possibility of the Federal Reserve raising interest rates continues to grow, the rates team led by analyst Mark Cabana at Bank of America has raised its expectations for U.S. Treasury yields across various maturities this year, warning of the recession and stagflation risks that a short-term surge in long-term bond yields may bring.
<h2>Employment Stability Goal Temporarily Achieved, Focus Shifts Back to Inflation</h2>
The U.S. December non-farm report shows that 256,000 new jobs were added in December, the largest increase in nine months, far exceeding the expected 165,000; the unemployment rate in December was 4.1%, lower than expected and down from November's 4.2%; although the year-on-year growth rate of average hourly wages has slowed, the overall growth rate remains high.
The Bank of America economic team believes this report &#34;closes the door on the Federal Reserve's rate cuts&#34; because the Federal Reserve's previous monetary policy focus has shifted from combating inflation to stabilizing employment, and the latest non-farm data indicates that the employment stability goal has been achieved, meaning there is no further need for the Federal Reserve to cut rates.
At the same time, since the current inflation level remains above the 2% target, the focus on the interest rate path will shift back to inflation. Therefore, the bank speculates that the risk of the Federal Reserve's next move is more inclined towards raising rates rather than cutting them.
The team also warned that 2025 will continue to be a year of unbalanced growth, meaning that policy uncertainty and divergence will intensify.
<h2>What Conditions Are Needed for the Federal Reserve to Raise Rates?</h2>
The Bank of America economic team stated that the current federal funds rate remains restrictive, and for discussions about raising rates to be brought to the table, &#34;the threshold will be very high,&#34; possibly requiring the year-on-year growth rate of the core PCE price index to exceed 3% + long-term inflation expectations to be out of control.
Latest data shows that the U.S. PCE price index rose 2.4% year-on-year in November, the highest level since July; the core PCE price index increased by 2.8% year-on-year, unchanged from the previous value.
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The bank's interest rate team also released a report stating that as the possibility of the Federal Reserve raising interest rates increases and the supply-demand imbalance in the U.S. Treasury market further intensifies, U.S. Treasury yields still have room to rise.
In the report, the team raised the forecast range for U.S. Treasury rates by a comprehensive 50 basis points, with the expected value for the 10-year U.S. Treasury yield adjusted to 4.75%.
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The Bank of America interest rate team expects that if the 10-year U.S. Treasury yield surges rapidly in a short period (for example, due to rising inflation or an expanding fiscal deficit causing market turmoil), it could impact the U.S. economy and stock market, increasing the likelihood of recession or stagflation.
The bank's banking team also added that while higher levels of U.S. Treasury yields generally lead to a gradual deterioration in credit quality, if the labor market remains resilient and U.S. GDP growth stays within the 2-3% range, credit is expected not to deteriorate significantly.
The team anticipates that the interest rate outlook remains uncertain, expecting that the federal funds rate will remain stable or slightly decline, while the 10-year U.S. Treasury yield may approach 5%

Bank of America believes that the latest non-farm payroll data indicates that the goal of stable employment has been achieved, and therefore there is no need for the Federal Reserve to further cut interest rates. If the year-on-year growth rate of the core PCE price index exceeds 3% and long-term inflation expectations become uncontrollable, it will lay the foundation for the Federal Reserve's next interest rate hike

- The recent strong non-farm payroll data has raised inflation concerns and shifted expectations regarding the Federal Reserve's interest rate decisions.  
- Analysts from Bank of America suggest that the robust employment figures indicate the end of the Fed's rate-cutting cycle, with a potential shift towards rate hikes due to persistent inflation risks.  
- The outlook for U.S. Treasury yields has been adjusted upward, with expectations that the 10-year yield may approach 5%, reflecting uncertainty in the interest rate landscape and potential economic impacts.

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Finally, a major bank has called it: interest rate cuts are a matter for 2024, and now we should discuss "what will cause the Federal Reserve to raise interest rates"?