BofA Global Research moves Fed rate cut forecast to October from December

Bank of America Global Research has advanced its forecast for the next Federal Reserve interest rate cut to October from December, citing signs of a softening labor market and the disruption of key economic data releases due to the government shutdown. While BofA remains the sole major brokerage predicting only one 25-basis-point cut this year, market participants are pricing in a 98% probability of an October cut and a 90% likelihood of a further cut in December, suggesting broader expectations for more aggressive easing despite BofA's warning of potential 'over-easing'.

Analysis

Bank of America Global Research has accelerated its forecast for a Federal Reserve interest rate cut, now expecting a 25-basis-point reduction in October rather than December, citing a discernible softening in the labor market. This adjustment positions BofA as an outlier among major Wall Street firms, as it maintains a forecast for only one cut this year, in contrast to peers like Goldman Sachs and Morgan Stanley who anticipate two. BofA has explicitly warned of a risk that the Fed could 'over-ease.' This divergence in analyst outlook is set against a backdrop of strong market conviction for more significant easing; futures pricing from the CME FedWatch tool implies a 98% probability of an October cut and a 90% likelihood of a second cut in December. The situation is further complicated by the U.S. government shutdown, which has delayed the release of key data such as the monthly jobs report, forcing the Fed and investors to rely on alternative indicators which BofA believes are already sufficient to justify a rate reduction.

Key Decisions for Investors

• Given that market pricing already reflects a very high probability of two rate cuts by year-end, investors should be aware that the primary risk is an asymmetric downside repricing in rate-sensitive assets if the Fed aligns with BofA's more cautious single-cut outlook.
• With the government shutdown delaying official economic reports, investors must place a higher weight on alternative, high-frequency labor market data to anticipate the Fed's policy decision in an information-constrained environment.
• The significant divergence between BofA's forecast and the market consensus presents a contrarian opportunity; a position aligned with BofA's view would benefit if the Fed proves more hawkish than expected, potentially heeding the bank's warning of 'over-easing'.