SouthernWorldwide.com – Bank of America has predicted that the Federal Reserve will not lower interest rates until the latter half of 2027. This forecast is primarily attributed to persistent inflation and robust job growth.
Previously, Bank of America Global Research had anticipated two rate cuts for the current year, scheduled for September and October. This earlier projection was partly influenced by the expectation that Kevin Warsh, President Trump’s nominee for Fed chair, would advocate for a more accommodative monetary policy.
However, the economic landscape has shifted, leading to a revision of this outlook. Economists at the financial firm communicated to clients that they no longer foresee any rate cuts this year. They also highlighted the increasing difficulty in predicting interest rate movements due to various economic shocks, including the Iran war, tariffs, and the emergence of artificial intelligence.
The sentiment that the Fed will maintain current rates throughout the year is not unique to Bank of America. CME Group’s FedWatch tool, which gauges financial market sentiment, indicates less than a 50% probability of rate cuts occurring before the second half of 2027.
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Several factors are contributing to the delay in potential Fed rate cuts, according to BofA Global Research. Firstly, despite Warsh’s expressed openness to reducing borrowing costs, a number of Fed officials remain hesitant to ease rates.
For example, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, and Alberto Musalem, President of the St. Louis Fed, have recently voiced concerns against cutting rates. Their apprehension stems from the possibility that productivity gains driven by AI could stimulate spending and lead to an overheating economy.
Secondly, the Federal Reserve is contending with rising inflation. At 3.3%, inflation remains significantly above the Fed’s target of 2% annually. Inflationary pressures have intensified since the onset of the Iran war, largely due to increased energy prices. While rate cuts are designed to stimulate economic growth, they also carry the risk of exacerbating inflation.
“Core inflation is too high, and moving up,” BofA Global Research stated in their client note. They further elaborated that rate cuts are more probable in the latter half of 2027, coinciding with a projected decline in inflation.
Economists at Deutsche Bank share a similar outlook, expecting consumer prices to stay above the Fed’s annual 2% target over the next year. They noted in a recent investor briefing that “Trend inflation has not shown clear signs of dipping below 3%.” This persistent inflationary pressure is attributed to ongoing factors, including the sustained impact of tariffs and the rising costs of computer hardware and software due to AI advancements.
Furthermore, a stronger-than-anticipated jobs report released on Friday has weakened the case for immediate rate cuts, according to BofA Global Research. The report indicated that employers added 115,000 jobs in April, surpassing the forecast of 65,000 payroll gains.
With the job market demonstrating continued strength, Wall Street analysts have indicated that the Federal Reserve will likely prioritize efforts to curb inflation. The decision-making body for interest rate adjustments is the Federal Open Market Committee (FOMC), comprising 12 members.
The Federal Reserve last reduced its rates in December 2025, implementing a quarter-percentage-point decrease in the federal funds rate. Since then, the federal funds rate has been maintained within its current range of 3.5% to 3.75%.
