May 8, 2026 — Bank of America now expects the Federal Reserve will hold off on cutting interest rates until the second half of 2027, citing persistent inflation and surprisingly strong job growth.
BofA Global Research had earlier forecast two cuts this year in September and October, a view partly shaped by the expectation that President Trump’s nominee Kevin Warsh would steer the Fed toward easing policy. That outlook has changed as economic conditions shifted.
“We no longer expect the Fed to cut rates this year,” BofA economists wrote in a note to clients, adding that a series of shocks — including the Iran war, tariffs and the rapid emergence of artificial intelligence — have made forecasting monetary policy more difficult.
Markets broadly mirror that caution. CME Group’s FedWatch tool shows under a 50% probability of rate cuts before the second half of 2027.
What’s slowing cuts? Several factors, BofA says. Although Warsh has signaled openness to easier policy, other Fed officials remain wary. Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem have recently opposed cutting rates, expressing concern that AI-driven productivity gains could spur spending and overheat the economy.
Inflation is another key constraint. Headline inflation stands at about 3.3%, well above the Fed’s 2% target, and has risen since the Iran conflict pushed energy prices higher. Rate reductions can stimulate growth but also risk rekindling inflationary pressure. BofA notes core inflation is “too high, and moving up,” and expects cuts to become more likely only once inflation begins to ease, toward H2 2027.
Deutsche Bank economists similarly expect consumer prices to remain above 2% over the coming year, saying trend inflation has not shown clear signs of falling below 3%. They point to ongoing inflationary forces such as tariffs and AI-related increases in computer hardware and software costs.
Labor market strength further weakens the case for easing. A stronger-than-expected April jobs report showed employers added 115,000 positions versus forecasts of 65,000, underscoring continued labor market resilience. With employment holding steady, many analysts say the Fed’s priority will remain tamping down inflation rather than stimulating growth.
Interest rate decisions are made by the Federal Open Market Committee, a 12-member panel. The most recent cut came in December 2025, when the Fed trimmed the federal funds rate by 25 basis points; the rate has stayed in a 3.5%–3.75% range since then.
Edited by Alain Sherter.