Recession risks eased by strong labor market as Fed focuses on inflation

• Bank of America said in a note on Wednesday that the Fed will focus on taming hyperinflation at next week’s Federal Reserve meeting.
• Meanwhile, a strong labor market indicates a lower recession risk, and the Fed will be less sensitive to any weakness there, analysts said.
• “Expect [Fed] Being less sensitive to a downturn in activity or slowdown in labor markets in the near term while trying to restore price stability.”

The Fed will remain focused on taming high inflation as a strong labor market keeps recession risks in check, according to Bank of America analysts.

In a note on Wednesday, Bank of America analysts led by Michael Gaben wrote that the US economy is already still overheated and predicted the Federal Reserve will raise interest rates by 75 basis points at next week’s policy meeting.

“Expect [Fed] Being less sensitive to a downturn in activity or slowdown in labor markets in the near term while trying to restore price stability.”

Bank of America said that with its June CPI showing 9.1% annual growth, well above expectations, inflation will remain the Fed’s priority.

Indeed, analysts added that a strong labor market will continue to increase inflationary pressure on the economy, there are few indications of a slowdown in employment.

For now, the base case scenario for Bank of America (BofA) remains a small downside, although a recession cannot be completely ruled out.

“The strong employment data indicates a strong fundamental momentum in the economy, which, along with everything else, reduces recession risks,” Bank of America said. “However, strong labor market data could feed additional inflationary pressures, and thus will lead to further monetary tightening.”