BofA Global Research is the latest brokerage to revise its Federal Reserve rate-cut forecast to much later dates, citing elevated inflation due to high energy prices and growing strength in the labor market.
BofA Global Research now expects the Fed to remain on hold for the rest of this year, with two quarter-point cuts in July and September 2027.
A host of global brokerages have recast their projections for Fed rate cuts in 2026, split between some easing and no cuts at all, Reuters reported. This comes as the 11-week Iran war pushed energy prices higher and left policymakers cautious about inflation risks.
The Fed held the benchmark Federal Funds Rate steady at 3.50% to 3.75% at its April 29 meeting in an unusually divisive 8–4 vote, the closest since 1992.
“The data simply don’t warrant cuts this year,” Aditya Bhave, the head of U.S. economics at Bank of America, wrote on May 8, as Bloomberg reported. “Core inflation is too high, and moving up. The solid April jobs report was the last straw, especially given hawkish Fedspeak.”
Bhave and colleagues now expect that the Fed will not cut rates again until July 2027, a shift from their previous forecast of September 2026.
Fed’s dual mandate requires tricky balance
The Fed’s dual mandate from Congress requires maximum employment and stable prices.
- Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
- Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.
When traders price the next Fed rate cut
Traders are currently pricing in the next interest-rate cut for mid-to-late 2027, according to the CME FedWatch Tool.
And as I reported, bond traders are rapidly reshaping their outlook on U.S. monetary policy, increasing bets that the Fed could raise interest rates before cutting them as persistent inflation risks and geopolitical tensions upend dovish expectations.
The Kalshi prediction market estimates a 47% chance of a Fed rate hike before July 2027.
Inflation figures show hike in energy prices
The April Consumer Price Index report will be released May 12.
The March CPI read pointed to an inflation rate of 3.3%, well above the Fed’s 2% goal.
Related: Fed official triggers new rate-cut warning
Economists estimate that the April headline CPI will be up 0.6% from March to April and 3.7% from the year prior with core CPI rising 0.3% month over month and 2.7% year over year.
The Bureau of Economic Analysis released the March 2026 Personal Consumption Expenditures — the Fed’s preferred inflation gauge — on April 30, showing an acceleration in headline inflation largely driven by energy costs.
- Headline PCE (year over year): 3.5%, up from 2.8% in February
- Core PCE (year over year): 3.2% (excluding food and energy), up from 2.9% in February
Strong April jobs report shifts rate-cut outlook
Despite the rising energy costs fueled by the Iran war, U.S. employers added more jobs than expected for a second month, and the unemployment rate held steady in April, the Bureau of Labor Statistics reported May 8.
- Nonfarm payrolls rose 115,000 last month after an even bigger surge in March, marking the strongest two-month increase since 2024.
- The unemployment rate was unchanged at 4.3%.
Federal Reserve Bank of Chicago President Austan Goolsbee said all options over interest-rate policy, including a possible rate hike, are on the table at the central bank.
“I don’t see how you can look at the current situation and, at least to me, view that the only thing that’s on the table conceivably are rate cuts,” Goolsbee said May 8 in an interview on Bloomberg Television.
Goolsbee’s comments add to the ongoing shift among Fed policymakers away from any consideration of a rate reduction in the near future.
BofA: Warsh will still push for lower rates
The BofA note said that with inflation stuck well above target and the oil spike pass-through still in the pipeline, it would have taken a weak April jobs report to keep the balance of risks within a range where incoming Fed Chair Kevin Warsh could push cuts through starting at the June Federal Open Market Committee meeting.
“We think Warsh will push for lower rates, but the data flow precludes cuts for now,” the BofA note, emailed to TheStreet, said.
“However, cuts should be in play by next summer, with inflation much closer to target,” the note said.
Related: Goldman Sachs sends blunt message on Fed interest rate cuts
