It's wrong to assume the central bank will soon turn dovish, as investors are showing some optimism that policy conditions could ease after the Federal Reserve issued another 75 basis point rate hike.
July's stock market gains of 12% marked the best month in over a year.
There is hope that the Fed is about to relax policy. The investment bank said in a note on Monday that the optimism is unwarranted.
Inflation is showing signs of being sticky through the end of the year, and analysts don't think there will be a rate cut until 2023. According to analysts from Bank of America, it will take a while for prices to come down from a 41-year high.
The Fed chair said at a press conference last week that he believed the interest rate had reached neutral levels, a level where monetary policy was not restrictive or expansionary.
The analysts are not as positive.
The Fed doesn't think hiking rates will cause a big problem. The tradeoff between growth and inflation has yet to be acknowledged, analysts said, referring to the possibility that the central bank may hike up rates too fast and halt economic growth, or the possibility that they would need to tolerate inflation to prevent a severe recession.
The belief in a soon-to-come economic expansion could set up investors for even more market volatility if that is the case.
They said investors may be tripped up by biases in volatile markets such as being unwilling to make changes to a portfolio, making too small changes too slow, or holding onto losing stocks for too long.
Analysts warn that the era of steady growth and inflation known as the Great Moderation is over. There is a new regime in place.
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