Bank of America’s Mark Cabana just dropped a phrase that should make every fixed-income investor sit up straight: “textbook inflation credibility shock.” The strategist warned on August 3 that US Treasuries will resume their retreat unless the Federal Reserve gets significantly clearer about how it plans to bring inflation back to 2%.
Long-dated Treasury yields had already climbed to levels not seen in nearly 20 years the week prior.
The numbers behind the warning
Here’s the situation. Core PCE inflation, the Fed’s preferred gauge, clocked in at 3.3% in June. That’s well above the 2% target the Fed has been talking about hitting for what feels like an eternity.
The federal funds rate has been parked at 3.50-3.75% through July under Chair Kevin Warsh. And BofA now thinks that’s about to change in a big way.
The bank has reversed its previous forecast of no rate changes in 2026. It now projects three 25-basis-point hikes coming in September, October, and December. That would push the fed funds rate to a range of 4.25-4.50% by year-end.
Geopolitical tensions have also been pushing energy prices higher, adding another layer of inflationary pressure that makes the Fed’s job even harder.
The Fed’s communication problem
The Fed under Kevin Warsh has maintained the 2% inflation target as official policy. But there’s a growing gap between what the Fed says it wants and what the data shows it’s achieving. Core PCE at 3.3% is 65% above target.
Cabana’s argument boils down to this: the Fed needs to either explain how it’s going to close that gap or acknowledge that it might take longer than markets expect. Silence, or vague reassurances, will only accelerate the Treasury selloff.
BofA’s projected path of three hikes would represent a meaningful tightening of financial conditions heading into 2027. Moving from 3.50-3.75% to 4.25-4.50% adds 75 basis points to the cost of borrowing across the economy.
What investors should watch in the coming weeks: the Fed’s next public communications for any shift in language around the 2% target, the July core PCE reading when it drops, and whether long-dated Treasury yields continue testing those two-decade highs.