There is a risk the Fed will 'overdo' it on rate hikes and cause unemployment to rise to 5%, Bank of America strategist says

The Federal Reserve is at risk of raising rates too high because central bankers will likely ignore falling inflation until they see more of a slowdown in the labor market.

He said in an interview that the Fed is likely to over use it.

August's consumer price index report showed inflation at 8.3%, down from July's 8.5% but higher than expectations for a sharper slide to 8.1%.

Policymakers seem more focused on the hot labor market, and waiting for a labor market slowdown to let up could be a mistake.

"We think the Fed will try to stick to this higher-for-longer slogan, but they're going to see a softer economic data in the future, and that's going to risk overdoing it in the future," he said.

The Fed could cause the economy to go into a recession if they overtighten, according to Cabana.

It's complicated by the fact that the effects of this summer's tightening won't be seen until early next year, and that quantitative tightening will take a little while before it really starts to bite.