Bank of America sees no Fed rate cuts until second half of 2027

Bank of America Global Research no longer expects the Federal Reserve to cut interest rates this year, reversing an earlier forecast for two quarter-point reductions in September and October 2026. The bank’s economics team now sees the next easing in the second half of 2027.

The reversal, published in a note to clients Thursday, rests on two data points: inflation at 3.3 per cent, well above the central bank’s 2 per cent target, and a labour market that added 115,000 jobs in April, nearly double the 65,000 consensus estimate.

“We no longer expect the Fed to cut rates this year,” BofA’s economics team wrote. “Core inflation is too high, and moving up.”

The federal funds rate has sat at 3.5 per cent to 3.75 per cent since December 2025, when the Fed delivered a quarter-point cut that brought the cumulative easing since September 2024 to 150 basis points. Markets had priced in at least one further reduction in 2026 before the BofA note landed. By Thursday afternoon, fed funds futures had repriced sharply.

BofA’s earlier call partly rested on the assumption that Kevin Warsh, President Trump’s nominee to replace Fed Chair Jerome Powell when his term expires in May 2026, would steer the committee toward faster easing. That assumption has run into two problems. Warsh has not been confirmed by the Senate. And the data has moved against him. Even a confirmed Warsh would inherit an inflation picture with little room to ease.

Fed officials push back

Cleveland Fed President Beth Hammack said this week that rates would likely stay on hold “for quite some time.” Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem have each warned that AI-driven productivity gains risk overheating the economy if the Fed eases prematurely.

The internal Fed debate centres on whether the neutral rate, the level that neither stimulates nor restrains the economy, has risen. If AI and onshoring are lifting productivity and investment demand, the fed funds rate at 3.5 per cent to 3.75 per cent may not be as restrictive as it looks. Goolsbee has framed the question as whether the central bank is “closer to neutral than we think,” according to recent public remarks.

What markets are pricing

The CME Group’s FedWatch tool, which tracks fed funds futures to infer rate expectations, now assigns less than a 50 per cent probability to any cut before the second half of 2027. That is a sharp downgrade from late 2025, when the market expected three to four quarter-point reductions through 2026.

Deutsche Bank economists echoed BofA’s caution, noting that trend inflation “has not shown clear signs of dipping below 3 per cent” and citing ongoing price pressure from tariffs and AI-linked spending on hardware and software. Consumer prices, they said, are likely to remain above 2 per cent through the next twelve months.

Three shocks, one Fed

The Fed faces three disruptions, each with its own inflation signature. The Iran conflict has pushed Brent crude back above $100 a barrel, feeding into transport and manufacturing costs. Tariffs imposed and threatened by the Trump administration, including levies on steel, aluminium, and Chinese imports, are feeding into goods prices and supply-chain costs. The rapid deployment of AI is lifting demand for computing infrastructure, semiconductors, and electricity, adding a demand-side vector that was absent from previous easing cycles.

The Fed’s own semi-annual stability report flagged oil shocks and geopolitical risks as the top threats to the US financial system, reinforcing the case for a pause.

Powell to Warsh

The BofA note reframes the Powell-to-Warsh transition for Wall Street. Where Powell’s Fed cut rates four times through late 2024 and 2025 as inflation eased from its 2022 peak above 9 per cent, Warsh, a former Fed governor and Treasury official, would enter at a moment when inflation progress has stalled, the labour market is beating estimates, and the Iran conflict has scrambled energy price assumptions.

BofA’s new base case implies the fed funds rate stays above 3 per cent for at least another year. For households carrying credit-card balances, auto loans, and mortgages, that means the cost of borrowing stays elevated. The average 30-year fixed mortgage rate hit 6.43 per cent this week, according to Freddie Mac data, adding pressure to an already strained housing market.

What to watch

The next consumer price index print, due in mid-May, is the nearest catalyst for a repricing. A reading below 3 per cent would challenge BofA’s thesis. A reading at or above 3.3 per cent would entrench it. The core personal consumption expenditures index, the Fed’s preferred gauge, follows at the end of the month.

Fed Chair Powell speaks in Washington next week. His remarks will be parsed for any shift in tone on the inflation outlook, particularly whether the committee is beginning to price in the Iran war’s second-round effects on energy, shipping, and insurance costs.

The rate-cut cycle that began in September 2024 is over, BofA’s economics team concluded. The next one has not been scheduled.