What BofA says it would take for the Fed's next rate move to be a hike

• The Federal Reserve is likely done cutting rates amid robust economic activity, BofA analysts say.
• They see a hike as a more likely than a cut at this point, and lay out what it would take to get one.
• The outlook comes after a surprisingly strong December jobs report.

The Federal Reserve's next rate move might be a hike, according to Bank of America analysts.

The analysts say the Fed is likely done with its easing cycle after a strong December jobs report, which showed the US economy added 256,000 jobs last month, coming in above forecasts of 164,000.

The blockbuster report, released Friday, shows the economy is capable of staying strong without further stimulus. Instead, the analysts say the Fed can divert its attention to reigning in sticky inflation.

"The Dec jobs report was gangbusters," the analysts, led by Aditya Bhave, wrote in a Friday note, adding, "Economic activity is robust. We see little reason for additional easing."

Now, the analysts see the Fed pivoting to an extended hold, but they warn there are risks emerging for a possible hike — especially if inflation remains well above the Fed's 2% target.

The analysts say that if the annual change in core personal consumption expenditures — which excludes volatile food and energy costs — rises above 3%, it could bring a hike onto the table.

A hike could also be a possibility if long-term inflation expectations rise, they added.

"The bar is high since the Fed still thinks rates are restrictive. But hikes will likely be in play if y/y core PCE inflation exceeds 3% and/or long-term inflation expectations become unanchored," they wrote.

Core PCE has typically been the Fed's preferred inflation gauge, and has flattened in recent months above the Fed's target. The measure's November reading showed prices increased 2.4% annually and 0.1% from October.

Market-based inflation, meanwhile, has been softer and is likely a better measure of underlying inflation, but has flattened out just like core PCE, the analysts say.

Even without lagged housing metrics included, the measure has still plateaued, showing inflation is stuck above target, they add.

Traders have similarly adjusted their rate cut projections following the latest jobs data, upping the odds of a hold this month to 97%, according to the CME FedWatch tool.

From now through December, traders see the Fed making one or two more cuts, though the chances of an extended hold have risen, with a 26% chance of no cuts, up from 13% on Thursday.