BofA Predicts Deeper Fed Rate Cuts Despite Hawkish Tone: 75 bps in Q4, 125 bps in 2025
A Shift in Rate Policy?
In a recent report, Bank of America (BofA) raised concerns that the Federal Reserve may not have done enough to counter economic challenges despite a recent 50 basis points (bps) rate cut. While the Fed characterized this adjustment as a “recalibration,” BofA anticipates further, more aggressive cuts in the near future. The investment bank forecasts an additional 75 bps cut in the fourth quarter of 2024 and another 125 bps by 2025, driven by mounting economic pressures.
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Fed Statement: A Mixed Message to Markets
The Federal Open Market Committee (FOMC) surprised some observers by issuing a statement that was less dovish than expected, even as it announced a rate cut. While emphasizing confidence in its inflation control efforts, the Fed also highlighted that the labor market and inflation risks were “roughly in balance.”
A Confident SEP, But Hawkish Dots
The Fed’s Summary of Economic Projections (SEP) remained optimistic, predicting above-trend growth and a quicker path toward lower inflation. Unemployment projections rose to 4.4%, though this was framed as reflecting current data rather than signaling a major economic shift.However, the Fed’s dot plot showed a sharp contrast to market expectations.
The median forecast for 2024 showed only 100 bps of cuts, with several members advocating just a 25 bps reduction later this year. BofA saw this as a credibility issue for the Fed, pointing out that pre-meeting indications suggested a smaller cut was likely. This discrepancy between the Fed’s communications and its actual policy could increase market pressures for more aggressive rate cuts.
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Disconnect Between the Fed and Markets
BofA predicts that the Fed will eventually align with market expectations, cutting rates further by 75 bps in Q4 2024 and 125 bps in 2025. According to the bank, this would bring the terminal interest rate down to a neutral range of 2.75%–3%.
Further Rate Cuts Likely as Economic Pressure Mounts
In its analysis, BofA highlighted the likelihood of deeper rate cuts due to ongoing economic challenges, particularly in the labor market. The bank predicts that despite the Fed’s hawkish communication, persistently weak employment data and softening economic indicators will push the central bank toward more aggressive cuts.
Conclusion: Deeper Cuts on the Horizon?
While the Federal Reserve has presented its recent rate cut as a measured response to changing economic conditions, BofA remains skeptical. In its view, the Fed’s cautious optimism is at odds with market realities, anddeeper rate cuts will likely be necessary to support the economy. BofA forecasts another 75 bps cut in the fourth quarter of 2024 and a further 125 bps in 2025, bringing rates to a neutral level of 2.75-3%.
Also Read: US Federal Reserve Slashes Rates by 50 bps: 5 Key Takeaways