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

Bank of America Global Research has advanced its forecast for the Federal Reserve's next interest rate cut to October from December, citing a softening labor market despite the government shutdown delaying key economic data. While BofA remains the sole major Wall Street firm predicting just one 25-basis-point cut this year and warns of potential 'over-easing,' market participants are pricing in a high probability of two cuts by year-end, indicating a divergence in expectations.

Analysis

Oct 3 (Reuters) - Bank of America Global Research on Friday pulled forward its forecast for the next Federal Reserve interest rate cut to October from December, citing signs of a softening labor market. It remains the only major Wall Street brokerage forecasting just one more 25-basis-point rate cut from the Fed this year, while others such as Goldman Sachs and Morgan Stanley expect cuts at both of the Fed's upcoming meetings. Get a daily digest of breaking business news straight to your inbox with the Reuters Business newsletter. Sign up here. Advertisement · Scroll to continue BofA warned there is a risk the Fed could "over-ease." The U.S. government shutdown, which began on Wednesday, has disrupted the release of key economic data that the Fed relies on to evaluate whether conditions warrant a rate cut. The release of the closely watched monthly jobs report, originally scheduled for Friday, has been delayed due to the government shutdown, leaving investors to interpret alternative indicators that point to a cooling labor market and reinforce expectations of a rate cut. BofA says the soft trend in labor data is already strong enough to justify a rate cut, regardless of whether the NFP report is available or not before Fed's October meeting. Advertisement · Scroll to continue Investors are pricing in a 98% probability of a 25-basis-point rate reduction in October and a 90% likelihood of another similar cut in December, according to CME Group's FedWatch tool. Reporting by Joel Jose in Bengaluru; Editing by Krishna Chandts Eluri Our Standards: The Thomson Reuters Trust Principles. Bank of America Global Research has accelerated its forecast for a Federal Reserve interest rate reduction to October from December, citing sufficient evidence of a softening labor market even without the government-shutdown-delayed NFP report. This adjustment, however, positions BofA as a notable outlier among major Wall Street firms, as it is the only one projecting a single 25-basis-point cut for the remainder of the year and explicitly warning of an "over-ease" risk. In stark contrast, peers such as Goldman Sachs and Morgan Stanley anticipate two cuts, a view strongly supported by current market pricing. According to the CME FedWatch tool, investors have priced in a 98% probability of an October cut and a 90% likelihood of a subsequent cut in December. This significant divergence between BofA's more cautious outlook and the dovish consensus priced into the market highlights the uncertainty created by the disruption of key economic data releases and sets the stage for potential market volatility depending on the Fed's actual policy path.

Key Decisions for Investors

• Given that market pricing heavily reflects a two-cut scenario, investors should be aware of the asymmetric risk; a single cut, as forecasted by BofA, or a more hawkish Fed stance could trigger a significant repricing in fixed-income and equity markets.
• Monitor alternative, high-frequency labor market indicators closely, as the delayed official jobs report means the Federal Reserve will be relying on this same alternative data for its October decision.
• The pronounced divergence in forecasts between major brokerages suggests a lack of consensus, warranting caution against over-committing to a single monetary policy outcome and favoring strategies that remain flexible.
• Consider the implications of BofA's 'over-ease' warning, as a more aggressive-than-warranted easing cycle could lead to future inflationary pressures or asset bubbles, impacting long-term portfolio construction.