SouthernWorldwide.com – Bank of America predicts that the Federal Reserve will not lower interest rates until the latter half of 2027, citing persistent inflation and robust job growth as the primary reasons.
Previously, Bank of America Global Research had anticipated two rate cuts this year, scheduled for September and October. This forecast was partially influenced by the expectation that Kevin Warsh, President Trump’s nominee to replace Jerome Powell as Fed chair, would advocate for a more accommodative monetary policy.
However, this outlook has shifted due to changes in the economic landscape.
“We no longer expect the Fed to cut rates this year,” stated economists from the financial firm in a client note on Friday. They also acknowledged that multiple economic shocks, including the Iran war, tariffs, and the emergence of AI, are complicating the prediction of interest rate movements.
The analysts at BofA are not the only ones forecasting that the Fed will maintain its current interest rate policy throughout the year. The FedWatch tool from CME Group, which gauges financial market sentiment, indicates a less than 50% probability of rate cuts occurring before the second half of 2027.
Factors Delaying Rate Cuts
Bank of America Global Research has identified several factors that could postpone Fed rate cuts. Firstly, despite Warsh signaling a willingness to ease borrowing costs, a number of Fed officials remain hesitant to reduce rates.
For example, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, and Alberto Musalem, President of the St. Louis Fed, have recently expressed reservations about cutting rates. Their concerns stem from the possibility that AI-driven productivity increases could stimulate spending and lead to an overheating economy.
Secondly, the Fed is contending with rising inflation, which at 3.3%, remains significantly above its annual target of 2%. Inflation has increased since the commencement of the Iran war, driven by elevated energy prices. While rate cuts are intended to stimulate economic growth, they also carry the risk of exacerbating inflation.
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“Core inflation is too high, and moving up,” BofA Global Research noted in its report, adding that rate cuts are more likely in the second half of 2027 as inflation begins to decline.
Economists at Deutsche Bank also project that consumer prices will stay above the Fed’s 2% annual target for the upcoming year.
“Trend inflation has not shown clear signs of dipping below 3%,” they commented in a May 8 note to investors. They pointed to ongoing inflationary pressures, including the continued impact of tariffs and AI, which are driving up the costs of computer hardware and software.
Strong Job Growth
A jobs report released on Friday, which exceeded expectations, further weakens the case for rate cuts, according to BofA Global Research. Employers added 115,000 jobs in April, surpassing the forecast of 65,000 payroll gains.
With data indicating a stable job market, Wall Street analysts stated on Friday that the Fed’s priority will be to curb inflation.
Decisions regarding interest rate cuts are made by a 12-member panel known as the Federal Open Market Committee, or FOMC.
The Federal Reserve last reduced its rates in December 2025, when it decreased the federal funds rate by a quarter of a percentage point. The federal funds rate has remained within its current range of 3.5% to 3.75% since that time.
