Bank of America CEO advises the Federal Reserve not to "overdo" rate cuts and expects the terminal rate to be around 3.25%.

On Wednesday, Brian Moynihan, CEO of Bank of America, warned the Federal Reserve:

The Federal Reserve was slow to raise borrowing costs in 2022, and now it must avoid being too aggressive in cutting rates.

The risk that Fed officials now face is "cutting too fast or too slow," and this risk is higher now than it was six months ago.

Moynihan, 65, is one of the longest-serving CEOs in the top U.S. banks, and he has indicated his intention to continue serving as CEO for the next few years. Since 2010, when Wall Street recovered from the subprime mortgage crisis, Moynihan was promoted to CEO and led the bank through the Credit Suisse crisis and the Silicon Valley banking crisis.

Last week, in a conference call discussing financial results, Moynihan said he expected the U.S. economy to "not land," meaning economic growth remains strong, forcing the central bank to maintain a hawkish stance for a longer time in fighting inflation. He emphasized this point on Wednesday:

With an unemployment rate of 4% and wage growth of 5%, it is difficult for economists to convince the world that a recession is imminent.

It is expected that the Federal Reserve will cut rates by another 50 basis points before the end of the year, followed by four 25 basis point rate cuts in 2025, ultimately bringing rates down to 3.25%.

In this scenario, inflation is expected to fall to 2.3% in 2025 and 2026.

Currently, investors have reduced their expectations for rapid rate cuts in the U.S., and some Federal Reserve officials have indicated that after the first rate cut since 2020 last month, they prefer to cut rates at a slower pace. At the same time, there are signs that the U.S. economy remains strong.It is worth noting that a longer-term policy of high interest rates will be a boon for banks. In this environment, banks are typically able to price larger spreads on their loan books. Moynihan stated:

"Interest rates around 3% at the end of the cycle will 'make the interest rate environment in the United States and other markets very different from what it has been for about the last fifteen years,' which is a better position for the banking industry. Bank of America's net interest margin — a key metric measuring the difference between loan interest rates and deposit interest rates — will widen to 2.3% over a longer period."