BofA Warns Fed May Push Rates Above 5%

Bank of America's rate strategists are warning investors to prepare for the possibility of the U.S. Federal Reserve pushing its benchmark rate above 5%. In a recent report, Mark Cabana and Meghan Swiber projected that the Fed could raise its benchmark rate to levels comparable to the 2022-2023 hiking cycle, when the upper bound of the policy rate peaked at 5.5%.

The strategists argue that market participants are underestimating the Fed's terminal rate and that the central bank will likely continue raising rates until financial conditions actually tighten. In this scenario, short-term rates would surge while long-term rates remain anchored, producing a clear flattening of the yield curve.

BofA's forecast is based on the Taylor Rule, which suggests the federal funds rate should be around 5.3%. The strategists also project that 2-year Treasury yields could rise to 5.25%, matching their 2023 peak.