BofA Global Research has recently adjusted its Federal Reserve rate-cut forecast, pushing back the expected cuts to much later dates. This move is in response to elevated inflation due to high energy prices and a strengthening labor market. The brokerage now anticipates the Fed to maintain the current rates for the remainder of the year, with two quarter-point cuts projected for July and September 2027.
Several global brokerages have also revised their projections for Fed rate cuts in 2026, with some predicting easing measures while others foresee no cuts at all. This shift comes after the 11-week Iran war drove energy prices up, leading policymakers to be cautious about inflation risks.
During its April 29 meeting, the Fed voted to keep the benchmark Federal Funds Rate steady at 3.50% to 3.75% in an 8–4 vote, the most divided decision since 1992. Aditya Bhave, the head of U.S. economics at Bank of America, emphasized that the current data does not support rate cuts this year. Core inflation is on the rise, and the strong April jobs report, coupled with hawkish Fedspeak, further solidified the decision to hold off on rate cuts until July 2027.
The Fed’s dual mandate requires a delicate balance between maximum employment and stable prices. Lower interest rates can stimulate hiring but also risk fueling inflation, while higher rates can cool prices but weaken the job market. Traders are currently pricing in the next interest-rate cut for mid-to-late 2027, with increasing speculation that the Fed may raise rates before cutting them due to persistent inflation risks and geopolitical tensions.
The April Consumer Price Index report, set to be released on May 12, is anticipated to show an inflation rate of 3.3%, exceeding the Fed’s 2% target. Economists predict a 0.6% increase in the April headline CPI from the previous month, with core CPI rising by 0.3%.
Despite the challenges posed by rising energy costs, the strong April jobs report indicated a robust job market and steady unemployment rate. Nonfarm payrolls increased by 115,000 last month, contributing to the strongest two-month job growth since 2024. Federal Reserve Bank of Chicago President Austan Goolsbee emphasized that all options, including a possible rate hike, are on the table given the current economic conditions.
While there is speculation that Fed Chair Kevin Warsh may advocate for lower rates, the data flow currently does not support immediate rate cuts. However, cuts could be considered by next summer as inflation moves closer to the target. The ongoing shift among Fed policymakers away from rate reductions indicates a cautious approach to monetary policy decisions.
