If something is going to break in the U.S. economy, it will probably happen this summer, BofA Global says

BofA Global economists highlight a non-base case risk of a U.S. economic 'break' occurring this summer. Their primary outlook for 2025 monetary policy posits that a robust labor market, coupled with potential tariffs under a Trump presidency, could generate enough inflation to preclude any Federal Reserve interest rate cuts throughout the year, implying a more hawkish rate trajectory under these specific conditions.

Analysis

BofA Global economists have outlined a dual-path scenario for the U.S. economy, flagging a significant, albeit non-base case, risk of an economic 'break' this summer. This cautious view, reflected in the moderately negative sentiment score, suggests investors should monitor for near-term systemic stress. The firm's primary forecast, however, focuses on 2025 monetary policy, positing that a combination of a resilient labor market and potential tariffs under a Trump presidency would likely generate sufficient inflationary pressure. Consequently, their base case is for the Federal Reserve to refrain from cutting interest rates entirely in 2025, a hawkish outlook that contrasts with broader market expectations and directly links political outcomes to future central bank policy.

Key Decisions for Investors

• Investors should stress-test portfolios for a 'higher for longer' interest rate environment, as BofA's base case of no Fed cuts in 2025 would challenge valuations for long-duration assets and growth stocks.
• Monitor high-frequency labor market data and leading economic indicators closely this summer for any signs of the economic 'break' that BofA identifies as a key tail risk.
• Incorporate political risk as a direct input for monetary policy expectations, as potential 2025 tariffs are presented as a primary driver for a more hawkish Fed stance.