Only One Wall Street Economist Expects a Fed Hike This Week: Here's Why

In 2005, Michael Burry started betting against the U.S. housing market. Home prices were rising, banks were lending freely, and his own investors begged him to stop.

He held on. Two years later, the trade made him one of the most famous investors on Wall Street.

Wall Street has its own contrarian this week. His name is Aditya Bhave.

Ahead of Wednesday afternoon’s Federal Reserve decision, the U.S. economist at Bank of America Global Research is still calling for a quarter-point hike.

That would lift the federal funds target range to 4.00%-4.25%, from 3.75%-4.00%.

Markets have largely made up their minds. Futures price roughly a 10% chance of a hike on Wednesday, according to Bhave. The two-year Treasury yield, the most sensitive to Fed expectations, was at 4.71% on Tuesday, down 1.4 basis points.

Unlike Burry, however, Bhave openly admits his conviction is low.

He believes the Fed should hike. He is far less sure it will.

Even Bank of America’s own rates strategists call him “the market outlier.”

Wall Street’s Lone Hawk: Why Bank of America Still Sees an October Fed Hike

The case starts with inflation.

September price data beat expectations by a wide margin, and the strength was broad enough to offset the downward revisions published a month earlier.

Bhave expects Thursday’s report on personal consumption expenditures, the Fed’s preferred inflation gauge, to show core prices up 0.35% in September. That would push the annual rate to 3.1%.

On that path, core inflation could end the year at 3.4%, he said.

Meanwhile, the bond market is no longer helping.

A few weeks ago, some Fed officials argued that surging long-term yields were doing part of the tightening for them. Since then, the 10-year yield has slipped back below 5%, trading at 4.97% on Tuesday.

As a result, Bhave sees a problem of consistency.

If officials cited higher yields as a reason for caution, they cannot now cite falling yields as another reason to wait without revealing a lopsided reaction function.

Above all, the decision is a test for Fed Chair Kevin Warsh.

He promised a “sea change” in how the Fed guides markets.

Yet, it was New York Fed President John Williams and Vice Chair Philip Jefferson whose comments priced the October hike out.

A move on Wednesday would show markets the Fed has stopped coordinating its messaging.

The counterargument is timing.

The meeting falls six days before the Nov. 3 midterm elections. Under Jerome Powell or Janet Yellen, Bhave noted, a hawkish surprise of that size would have had almost no chance.

Hike or Hold, the Fed Is Not Done

For Bhave, a hold would not change much.

He would still pencil in hikes in December and March, with risks tilted toward further moves in June and possibly September 2027.

“The Fed has started hiking rates and probably has more work to do,” he said.

In addition, Bank of America’s rates team sees a sharp market reaction if the contrarian is right. A surprise hike could lift the two-year yield by 15 to 20 basis points and flatten the yield curve.

That would hit short-dated Treasuries hardest.

The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY), which tracks the part of the market most exposed to the Fed’s next move, traded flat at $81.48 on Tuesday.

Long bonds have had a different month. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) rose 0.4% to $81.68, extending a 2.9% gain over the past month as investors sought safety during the tech sell-off.

By contrast, a hold followed by a muddled press conference could steepen the curve and weigh on the dollar, echoing the July meeting.