Saudi Press

Saudi Arabia and the world
Thursday, Sep 18, 2025

'The Fed has to do the dirty work' and induce a US recession that's deeper than Europe's as the economy is clearly overheating, BofA says

'The Fed has to do the dirty work' and induce a US recession that's deeper than Europe's as the economy is clearly overheating, BofA says

"If the Fed wants to get labor cost inflation under control in a timely manner, we think it needs to engineer about a 2% rise in the unemployment rate."
The Federal Reserve faces the difficult task of cooling down a searing-hot labor market, and aggressive rate hikes will ultimately tip the US economy into a deeper recession than what Europe will likely see, according to Bank of America. 

Because Europe had a less rapid recovery from the pandemic compared to the US, Europe's GDP has less room to fall, BofA said, adding that the eurozone still hasn't fully recovered from the recession with hours worked far below pre-pandemic levels and wage growth only inching higher.

"Europe does not need to cool off its labor market to get inflation down," analysts wrote in a note Friday. "By contrast, the Fed has to do the dirty work of bringing labor demand down and in line with labor supply. Adding to the challenge is the fact that pent-up demand for labor in the US is making it very hard to cool off the labor market. So the Fed has to deal with both the risk of second-round effects and the first-round effect of an overheating labor market."

The strength of the US labor market was on display Friday, when the Labor Department reported nonfarm payrolls increased by 261,000 in October, above expectations, while unemployment rose to 3.7%, above the expected 3.5%. 

BofA analysts said the US economy is "clearly overheating," particularly the labor market, as robust wage growth shows few signs of easing.
The jobs data opens the door for the Fed to stay aggressive with its rate hikes, even after it made its fourth consecutive 75-basis-point increase on Wednesday. The fed fund rate now sits at 3.75% to 4%.

BofA now sees the Fed eventually hiking the benchmark rate to 5.25%, up from its previous prediction for 4.75% to 5%, while the European Central Bank's terminal rate will be 2.5%. 

"If the Fed wants to get labor cost inflation under control in a timely manner, we think it needs to engineer about a 2% rise in the unemployment rate," the note said.

As a result, analysts see the US economy shrinking at an annualized pace of 1.5% in the first three quarters of next year. The eurozone is seen contracting by 1.2% and 1.6% over the two winter quarters, then rebounding to trend-like growth of roughly 1% over the remainder of next year.

To be sure, Europe faces significant downside risks that could change the outlook, such as the prospect of further natural gas supply cuts from Russia as well as uncertainty from upcoming sanctions on Russian oil.  

"We can't rule out additional shocks to the energy market, due to additional supply disruptions," BofA said. "Europe is vulnerable to confidence shocks if the war in Ukraine escalates. And Europe is quite vulnerable to a colder-than-normal winter."
Newsletter

Related Articles

Saudi Press
0:00
0:00
Close
Saudi Arabia cracks down on music ‘lounges’ after conservative backlash
Saudi Arabia Signs ‘Strategic Mutual Defence’ Pact with Pakistan, Marking First Arab State to Gain Indirect Access to Nuclear Strike Capabilities in the Region
Sam Altman sells the 'Wedding Estate' in Hawaii for 49 million dollars
Turkish car manufacturer Togg Enters German Market with 5-Star Electric Sedan and SUV to Challenge European EV Brands
World’s Longest Direct Flight China Eastern to Launch 29-Hour Shanghai–Buenos Aires Direct Flight via Auckland in December
New OpenAI Study Finds Majority of ChatGPT Use Is Personal, Not Professional
Kuwait opens bidding for construction of three cities to ease housing crunch.
This Week in AI: Meta’s Superintelligence Push, xAI’s Ten Billion-Dollar Raise, Genesis AI’s Robotics Ambitions, Microsoft Restructuring, Amazon’s Million-Robot Milestone, and Google’s AlphaGenome Update
Indian Student Engineers Propose “Project REBIRTH” to Protect Aircraft from Crashes Using AI, Airbags and Smart Materials
Could AI Nursing Robots Help Healthcare Staffing Shortages?
Turkish authorities seize leading broadcaster amid fraud and tax investigation
Qatari prime minister says Netanyahu ‘killed any hope’ for Israeli hostages
Apple Introduces Ultra-Thin iPhone Air, Enhanced 17 Series and New Health-Focused Wearables
Big Oil Slashes Jobs and Investments Amid Prolonged Low Crude Prices
Social Media Access Curtailed in Turkey After CHP Calls for Rallies Following Police Blockade of Istanbul Headquarters
Did the Houthis disrupt the internet in the Middle East? Submarine cables cut in the Red Sea
Gold Could Reach Nearly $5,000 if Fed Independence Is Undermined, Goldman Sachs Warns
Uruguay, Colombia and Paraguay Secure Places at 2026 World Cup
Trump Administration Advances Plans to Rebrand Pentagon as Department of War Instead of the Fake Term Department of Defense
Tether Expands into Gold Sector with Profit-Driven Diversification
Trump’s New War – and the ‘Drug Tyrant’ Fearing Invasion: ‘1,200 Missiles Aimed at Us’
At the Parade in China: Laser Weapons, 'Eagle Strike,' and a Missile Capable of 'Striking Anywhere in the World'
Information Warfare in the Age of AI: How Language Models Become Targets and Tools
Israeli Airstrike in Yemen Kills Houthi Prime Minister
After the Shock of Defeat, Iranians Yearn for Change
YouTube Altered Content by Artificial Intelligence – Without Permission
Iran Faces Escalating Water Crisis as Protests Spread
More Than Half a Million Evacuated as Typhoon Kajiki Heads for Vietnam
HSBC Switzerland Ends Relationships with Over 1,000 Clients from Saudi Arabia, Lebanon, Qatar, and Egypt
Sharia Law Made Legally Binding in Austria Despite Warnings Over 'Incompatible' Values
Dogfights in the Skies: Airbus on Track to Overtake Boeing and Claim Aviation Supremacy
Tim Cook Promises an AI Revolution at Apple: "One of the Most Significant Technologies of Our Generation"
Are AI Data Centres the Infrastructure of the Future or the Next Crisis?
Miles Worth Billions: How Airlines Generate Huge Profits
Zelenskyy Returns to White House Flanked by European Allies as Trump Pressures Land-Swap Deal with Putin
Beijing is moving into gold and other assets, diversifying away from the dollar
Cristiano Ronaldo Makes Surprise Stop at New Hong Kong Museum
Zelenskyy to Visit Washington after Trump–Putin Summit Yields No Agreement
High-Stakes Trump-Putin Summit on Ukraine Underway in Alaska
Iranian Protection Offers Chinese Vehicle Shipments a Cost Advantage over Japanese and Korean Makers
Saudi Arabia accelerates renewables to curb domestic oil use
Cristiano Ronaldo and Georgina Rodríguez announce engagement
Asia-Pacific dominates world’s busiest flight routes, with South Korea’s Jeju–Seoul corridor leading global rankings
Private Welsh island with 19th-century fort listed for sale at over £3 million
Sam Altman challenges Elon Musk with plans for Neuralink rival
Australia to Recognize the State of Palestine at UN Assembly
The Collapse of the Programmer Dream: AI Experts Now the Real High-Earners
Armenia and Azerbaijan to Sign US-Brokered Framework Agreement for Nakhchivan Corridor
British Labour Government Utilizes Counter-Terrorism Tools for Social Media Monitoring Against Legitimate Critics
WhatsApp Deletes 6.8 Million Scam Accounts Amid Rising Global Fraud
×