BofA Says Investors Back Fed’s Credibility With Rate-Cut Timing

(Bloomberg) — Financial markets are betting the Federal Reserve will still be “ahead of the curve” when it starts lowering borrowing costs, according to Bank of America Corp.’s Michael Hartnett.

The strategist pointed to a rally in banks and interest-rate sensitive stocks as well as a drop in investment-grade credit spreads, which suggests investors are “saying the Fed can cut with credibility and is cutting into US growth re-acceleration,” he said.

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US stocks have scaled record highs on wagers that the central bank will reduce rates by at least 25 basis points at its meeting next week. The KBW Bank Index is advancing for a fifth straight month, while the Russell 2000 Index of small caps is set to outperform the S&P 500 for a second month.

US investment-grade corporate bond spreads are also at 75 basis points, near their lowest level since the 1990s. Wall Street strategists have broadly turned more optimistic about the outlook for US stocks on robust corporate earnings and a boom in artificial intelligence.

Still, a recent slowdown in the labor market has fueled some concerns that the Fed has waited too long to resume rate cuts. President Donald Trump has also amped up pressure on the central bank to lower rates. Some traders are betting on a jumbo 50-basis-point reduction next week.

BofA’s Hartnett said a drop of about 8% or more in the KBW Bank Index, a reversal in the small-cap rally and rising credit spreads would indicate “the Fed is actually behind-the-curve and cutting into further economic deceleration.”

Hartnett reiterated a preference for international stocks to US peers, a call that has proved correct this year with the MSCI ACWI ex-US index outperforming the S&P 500.

–With assistance from Jan-Patrick Barnert, Michael Msika and Tasos Vossos.

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