Bank of America announces huge shift in Fed rate cut forecast

Bank of America has significantly revised its Federal Reserve rate cut forecast, now anticipating a 25 basis point reduction in September and another in December, with further cuts modeled through 2026. This pivot from their previous no-cut stance through 2025 is attributed to the notable deterioration in the U.S. labor market, specifically the August unemployment rate rising to 4.3% and a 66% year-over-year increase in layoffs, despite persistent 2.7% inflation. The shift indicates a potential re-prioritization by the Fed towards labor market weakness under its dual mandate, forcing earlier monetary policy easing.

Analysis

Bank of America has materially altered its monetary policy outlook, now forecasting a 25 basis point Federal Reserve rate cut in September and another in December, a stark reversal from its previous stance of no cuts through 2025. This pivot is directly attributed to mounting weakness in the U.S. labor market, evidenced by the August unemployment rate rising to a new cycle high of 4.3%, year-to-date layoffs increasing 66% year-over-year, and job openings falling to 7.2 million from a peak of over 12 million in 2022. The forecast change suggests that labor market deterioration is now expected to outweigh persistent inflation concerns, which have seen the CPI rise to 2.7% as of July. This shift in the Fed's perceived priorities is mirrored in market expectations, with the CME Group's tool now indicating an 88% probability of a September cut. BofA's revised model extends beyond 2024, projecting an additional 50 basis points of cuts in 2025 and 75 basis points in 2026, signaling the potential start of a multi-year easing cycle.

Key Decisions for Investors

• Re-evaluate positioning for a dovish Fed pivot, as the forecasted start of an easing cycle increases risks for hawkish bets and creates opportunities in rate-sensitive assets like growth equities and fixed income.
• Monitor upcoming inflation data, particularly the CPI and PPI reports, with heightened scrutiny, as any upside surprises represent the key risk that could derail the nascent rate-cut narrative and inject market volatility.
• Consider the projected multi-year trajectory of rate cuts through 2026 for strategic portfolio construction, as this outlook supports extending duration in fixed income and favoring sectors with long-term sensitivity to lower borrowing costs.