CHARLOTTE, N.C. — Bank of America is now expecting the Federal Reserve to hold interest rates steady through 2026 and delay any cuts until the second half of 2027, citing persistent inflation, strong job growth and economic uncertainty tied to geopolitical tensions, tariffs and artificial intelligence.
Economists with Bank of America Global Research said they had abandoned an earlier forecast that called for two rate cuts later this year, in September and October. The firm had partly based that earlier outlook on expectations that Kevin Warsh, President Donald Trump’s nominee to succeed Jerome Powell as Federal Reserve chair, could favor looser monetary policy.
“We no longer expect the Fed to cut rates this year,” the economists wrote in a note to clients, according to the firm.
Economic Shocks Cited
The analysts said multiple economic shocks — including the Iran war, tariffs and the rapid expansion of AI-related investment — are complicating forecasts for future monetary policy decisions.
The revised outlook aligns with broader market sentiment. The CME Group FedWatch Tool, which tracks market expectations for Federal Reserve policy, shows investors assigning less than a 50% probability of any rate cuts before the second half of 2027.
Bank of America said several Federal Reserve officials remain hesitant to ease borrowing costs despite signs that some policymakers may be open to lower rates.
Concerns Over ‘Overheating’
Among them are Austan Goolsbee and Alberto Musalem, who have recently expressed concerns that productivity gains driven by artificial intelligence could fuel consumer spending and overheat the economy.
Inflation also remains a major obstacle to lower rates. Consumer prices are running at 3.3%, well above the Fed’s long-term target of 2%. Economists said inflation pressures have intensified since the start of the Iran conflict, largely because of higher energy prices.
“Core inflation is too high, and moving up,” Bank of America Global Research said in its note, adding that rate reductions are more likely once inflation begins to ease in 2027.
Economists at Deutsche Bank also said they expect inflation to remain elevated over the next year. In a May 8 note to investors, Deutsche Bank said inflation trends have “not shown clear signs of dipping below 3%,” citing the continuing effects of tariffs and higher technology costs linked to AI demand.
A stronger-than-expected U.S. jobs report released Friday further weakened the case for near-term rate cuts, Bank of America said. Employers added 115,000 jobs in April, above economists’ forecasts of 65,000 new positions.
