Bank of America delays Federal Reserve rate cut forecast to mid-2027
The bank's latest projection pushes the first interest rate reduction from September 2026 to July 2027, aligning with recent hawkish signals from central bank policymakers.
Bank of America Global Research has significantly revised its outlook for Federal Reserve interest rate policy, forecasting that rates will remain steady through the remainder of 2026 before any reductions begin in July 2027. This marks a notable delay from the bank's earlier projection of September 2026, reflecting a reassessment of the economic backdrop following recent data releases.
The revision is driven primarily by persistent inflationary pressures, specifically elevated energy costs linked to the ongoing conflict in Iran, alongside a robust labour market. With core inflation moving above the Federal Reserve's 2 per cent target, the bank now expects the Federal Funds Rate to hold between 3.50 per cent and 3.75 per cent for the rest of this year.
Aditya Bhave, head of U.S. economics at Bank of America, stated on 8 May that the available data simply does not warrant rate cuts this year. He cited the solid April jobs report as the final factor pushing against easing, noting that core inflation remains too high and is trending upwards. This stance aligns with recent comments from Federal Reserve President Austan Goolsbee, who indicated on the same day that rate hikes remain an option given the current conditions.
Recent macroeconomic indicators have reinforced this cautious approach. March Personal Consumption Expenditures data, released on 30 April, showed headline inflation at 3.5 per cent year-on-year, while core PCE rose to 3.2 per cent. Furthermore, the April jobs report revealed that nonfarm payrolls increased by 115,000, marking the strongest two-month increase in payrolls since 2024, with the unemployment rate holding steady at 4.3 per cent.
Market participants are already adjusting their expectations to match these institutional forecasts. Traders are currently pricing in the next interest rate cut for mid-to-late 2027, with the Kalshi prediction market estimating a 47 per cent chance of a rate hike before July 2027. The upcoming April Consumer Price Index report, due for release on 12 May, is expected to show a 0.6 per cent month-on-month increase and a 3.7 per cent year-on-year rise.
The divergence between the Fed's dual mandate of maximum employment and stable prices has created a complex environment for policymakers. While lower interest rates support hiring, they risk fueling further inflation, a scenario that could lead to an inflationary spiral. Conversely, higher rates cool prices but can weaken the job market, increasing the cost of borrowing and stifling economic activity.
