BofA’s Cabana Says It’s Premature to Call End to Fed’s Hiking Cycle

The market is prematurely pricing in the end of the Federal Reserve's interest rate hiking cycle based on three flawed consensus views: expected de-escalation in Iran, a belief that U.S. growth has peaked, and the assumption that central banks are nearing their terminal rates. Mark Cabana, Head of US Rates Strategy at Bank of America, argues that robust economic fundamentals contradict this narrative. Internal debit and credit card data show an uptick in holiday spending, while the four-week moving average for initial unemployment claims has reached its lowest point since the pandemic, signaling a strengthening labor market. Furthermore, the recent decline in oil prices acts as a "tax cut" for consumers, likely fueling further resilient growth. Because the Fed has "slow-walked" initial hikes, a higher terminal rate may be necessary to curb persistent inflation, suggesting that investors should prepare for a longer hiking cycle and flatter yield curves.