Here's the case against a September rate cut — and why the Fed could stay on hold until 2026

BofA Global Research disputes market expectations for a September Federal Reserve rate cut, maintaining its forecast for rates to remain on hold until 2026, despite futures pricing an 85% probability of an earlier reduction. The firm argues that balanced labor supply and demand shifts, including 800,000 foreign-born workers exiting since April, have kept unemployment mild, while strengthening consumer spending and persistent inflation—exacerbated by potential tariff impacts—present greater Fed concerns than labor market weakness. BofA contends markets are conflating recession with stagflation, suggesting only significantly weak inflation readings or a sharp rise in unemployment to 4.4% could prompt a September cut, even as U.S. stocks rallied Monday on rate cut hopes.

Analysis

A significant divergence exists between current market pricing and a contrarian outlook from BofA Global Research regarding Federal Reserve monetary policy. While fed-funds futures indicate an 85% probability of a September interest-rate cut, BofA maintains its forecast for rates to remain on hold until 2026. Their core argument rests on a labor market that is less slack than perceived; a decline in labor demand has been matched by a contraction in supply, evidenced by 800,000 foreign-born workers exiting the labor force since April, which has kept the unemployment rate relatively stable. According to BofA, the Fed's primary concern remains persistent inflation, which has shown little progress over the past year and faces upside risk from tariffs, making a rate cut based on an unconfirmed labor market forecast unlikely. This view is supported by BofA's internal data showing strengthening consumer spending, suggesting economic resilience rather than a recessionary slowdown. BofA contends that markets are misinterpreting economic signals as a recession instead of stagflation. However, they concede that two consecutive tepid inflation reports or a rise in the unemployment rate to 4.4% in the August jobs report could shift the Fed's stance and place a September cut back on the table.

Key Decisions for Investors

• Given the high market pricing for a September rate cut, investors should consider the asymmetric risk of a hawkish surprise and evaluate hedging strategies against a 'higher-for-longer' rate scenario as outlined by BofA.
• Monitor upcoming July and August inflation data and the August jobs report with extreme prejudice, as a significant miss, particularly an unemployment rate climbing to 4.4%, is cited as a key catalyst that could invalidate BofA's thesis and trigger a policy shift.
• Re-evaluate portfolio positioning, as a stagflationary environment of resilient consumer spending but persistent inflation would favor different asset classes than the recessionary slowdown currently being priced in by rate-sensitive markets.