Fed unlikely to cut interest rates until second half of 2027, Bank of America says
Bank of America has revised its prediction for the Federal Reserve’s interest rate decisions, now forecasting that rate cuts will be delayed until the second half of 2027. This shift in outlook is primarily attributed to strong inflation rates and resilient job growth in the current economic climate.
Initially, Bank of America Global Research had anticipated two rate cuts in September and October of this year. However, recent developments have led to a change in this projection. The uncertainty surrounding the economy, including factors such as the Iran war, tariffs, and the emergence of artificial intelligence, has made it increasingly difficult to accurately predict interest rate movements.
The reluctance to implement rate cuts can also be attributed to the differing opinions among Federal Reserve officials. While Kevin Warsh, President Trump’s nominee for Fed chair, has indicated a willingness to ease borrowing costs, other key figures within the Fed remain cautious. Presidents Austan Goolsbee and Alberto Musalem have voiced concerns about potential overheating of the economy due to AI-driven productivity gains.
Another factor impeding rate cuts is the persistent rise in inflation rates, currently standing at 3.3%, well above the Fed’s 2% target. The spike in inflation can be attributed to higher energy prices resulting from the Iran war. While rate cuts can stimulate economic growth, they also have the potential to exacerbate inflationary pressures.
Deutsche Bank economists also anticipate that consumer prices will continue to exceed the Fed’s target over the next year. Ongoing inflationary pressures, including the impact of tariffs and rising costs of computer hardware and software due to AI, are expected to contribute to this trend.
Additionally, a stronger-than-expected jobs report released recently has further weakened the argument for rate cuts. With employers adding 115,000 jobs in April, surpassing forecasts, the job market remains robust. As a result, Wall Street analysts believe that the Fed’s focus will shift towards controlling inflation rather than implementing rate cuts.
Ultimately, the decision to adjust interest rates lies with the Federal Open Market Committee (FOMC), a 12-member panel. The last rate cut occurred in December 2025, and the federal funds rate has remained between 3.5% and 3.75% since then.
In conclusion, Bank of America’s revised forecast reflects the complex economic landscape and the various factors influencing the Federal Reserve’s monetary policy decisions. The delay in rate cuts until the second half of 2027 underscores the challenges of balancing economic growth with inflation control in the current environment.
