No one knows for sure when the Fed will make its first rate hike in nearly a decade, but Bank of America says everyone is ignoring an interesting risk: that the Fed doesn't hike and actually embarks on another round of QE. Here's an excerpt from a note sent out by the firm and lead analyst Savita Subramanian.
Biggest risk to global equities? Another round of US QE
While most are focused on the risks around a withdrawal of liquidity, we believe the biggest hit to confidence could be the opposite: if another round of US QE is necessary to prop up the economy. While the market could have a knee-jerk rally on an indication of forthcoming stimulus, we think this would likely be short-lived and could end in the red. QE fatigue is already evident: each subsequent round of QE has seen diminishing risk rallies. Another round of QE would imply that $4.5tn was not enough. And it would also likely have a very negative read-through for QE programs currently underway in Europe and Japan. This is not our base case, but is the risk that seems to be getting the least attention.
The firm doesn't expect that the Fed will take this course, but the team does believe it is enough of a possibility that it should not be ruled out. And while a return to QE may be very remote, it is true that Yellen wants to avoid the path of Sweden, which raised rates prematurely after the crisis and was forced to backtrack.
All this comes as the Fed meets this week and Fed chair Janet Yellen is scheduled to speak on Wednesday. The majority of Wall Street doesn't see any changes at this meeting, and that the Fed won't do anything until at least September if not later.
Bank of America's call is for the Fed to begin raising rates in 25bp increments later this year, with more hikes coming at every other meeting. That is much slower than previous cycles.