Why the Fed hiked into a supply shock?

The Federal Reserve’s recent decision to raise interest rates during an ongoing supply shock was driven by a booming nominal U.S. economy, according to a research note from Bank of America. While central bankers typically advise against monetary tightening during a supply shock, BofA Global Research found that U.S. real economic growth has remained surprisingly stable despite accelerating inflation.

The concern surrounding hiking into a supply shock is that real growth might already be weakening, potentially inflicting more pain on the economy. However, the real economy has been stable of late, even as inflation has surged. Nominal growth in the U.S. has been strong, with a year-over-year increase of 6.3% for nominal consumer spending.

Historical data suggests that core Personal Consumption Expenditures (PCE) inflation tends to overshoot the central bank’s 2% target when nominal spending exceeds 5%. Consequently, the Fed faces the challenge of curbing nominal demand, especially since current spending levels are high despite slower population growth. Bank of America raised its third-quarter 2026 U.S. GDP growth estimate to 3.0% annualized, citing stronger-than-expected August retail sales data.