BofA sees U.S. avoiding a recession, the Fed not cutting rates this year

Bank of America projects the U.S. economy will avoid a recession in 2025 and that the Federal Reserve will not cut rates this year, citing strong consumer spending and persistent goods inflation, as evidenced by June retail sales data. The bank cautions that politically motivated rate cuts could backfire, potentially bear steepening the yield curve, de-anchoring inflation expectations, weakening the dollar, and increasing credit risk.

Analysis

Bank of America presents a hawkish macroeconomic outlook, projecting the U.S. economy will avoid a recession in 2025 and that the Federal Reserve will refrain from interest rate cuts in 2024. This view is anchored by evidence of persistent economic resilience, specifically citing sticky goods inflation and robust consumer activity, as demonstrated by the 0.5% month-over-month rise in the June retail sales control group. The bank introduces a significant risk factor by highlighting that political pressure on the Fed to ease policy in an election year "raises the bar for cuts." BofA warns that a premature, politically motivated pivot could severely backfire, potentially triggering a bear steepening of the yield curve, de-anchoring inflation expectations, weakening the dollar, and elevating credit risk. While forecasting some moderation with an expected 11% decline in durable goods orders, the bank's core thesis remains that current economic strength does not warrant monetary easing.

Key Decisions for Investors

• Investors should consider underweighting long-duration fixed income positions, given the risk of a bear steepening yield curve and the potential for higher-for-longer interest rates outlined in the bank's forecast.
• Portfolio positioning could favor cyclical sectors benefiting from robust consumer spending over highly rate-sensitive growth stocks, which may face headwinds if the Federal Reserve remains hawkish.
• Closely monitor upcoming inflation reports and Fed communications for any signs of political influence on monetary policy, as a premature pivot is identified as a key risk that could destabilize currency and credit markets.