Bank of America sees two Fed rate cuts this year vs. none before

Economists at Bank of America Corp. forecast two Federal Reserve interest-rate cuts this year — in September and December — based on weak August employment data, scrapping what had become an outlier call for no action until next year.

“There is now clearer evidence of deterioration in labor demand, not just supply,” Aditya Bhave said in a report. The new forecast also includes three quarter-point cuts in 2026 beginning in June, bringing the target range for the policy rate to 3%-3.25% from 4.25%-4.5%.

US inflation as measured by the core personal consumption expenditures gauge is likely to reach 3% in August and rise further through year-end, keeping the Fed from lowering rates in October, Bhave wrote.

The new 2025 forecast aligns with market expectations and most other Wall Street views. Swap contracts that predict Fed decisions resumed fully pricing in a September rate cut Friday after August employment data were weaker than economists estimated, and priced in a higher likelihood of quarter-point cuts at each of this year’s three remaining policy meetings.

The jobs report showed nonfarm payrolls increased by 22,000 in August compared with a median economist estimate of 75,000. The unemployment rate increased to 4.3%, the highest since 2021, in line with the median estimate.

Among major Wall Street banks, only Bank of America wasn’t already forecasting a September cut.

Their official forecast since April had been for no Fed action until the second half of next year, when they predicted 100 basis points of easing. But the Bank of America economists last month acknowledged — based on Fed Chair Powell’s Aug. 22 comments at the central bank’s annual Jackson Hole Symposium — that “the risks have obviously shifted meaningfully toward a cut” in September.

And earlier this week, on Sept. 3, they said “rushing to cut rates could translate into a policy error” in the context of “a supply-driven slowdown in the labor market, core inflation around 3% and the economy re-accelerating.”

US President Donald Trump for months has been prodding Fed policymakers to cut interest rates, and several are inclined to. The two Fed governors he appointed — Christopher Waller and Michelle Bowman — dissented from the July decision to hold rates steady, in favor of cutting them. Since then, regional bank presidents including San Francisco’s Mary Daly and Atlanta’s Raphael Bostic also have expressed at least limited support for a September cut.

Not all Fed policymakers favor lowering rates this month. Cleveland Fed President Beth Hammack has said inflation remains too high to cut rates this month. Hammack isn’t a voting member of the Fed’s rate-setting committee until next year, however.