Introduction to Interest Rate Cuts
The US Federal Reserve is expected to cut interest rates twice this year, in September and December, according to economists at Bank of America. This forecast is based on weak August employment data, which suggests a deterioration in labor demand. The economists had previously predicted no interest rate cuts until next year, but have now changed their forecast.
Reasoning Behind the Forecast
The new forecast includes three quarter-point cuts in 2026, starting in June, which would bring the target range for the policy rate to 3 to 3.25 percent from 4.25 to 4.5 percent. The economists believe that US inflation, as measured by the core personal consumption expenditures gauge, will reach 3 percent in August and rise further by the end of the year. This will prevent the Fed from lowering rates in October.
Alignment with Market Expectations
The new forecast aligns with market expectations and most other Wall Street views. Swap contracts that predict Fed decisions have resumed fully pricing in a September rate cut after the August employment data was weaker than estimated. This suggests that the market is also expecting a rate cut in September.
Previous Forecast
Bank of America was the only major Wall Street bank that was not 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. However, the Bank of America economists acknowledged last month that the risks had shifted towards a cut in September, based on Fed chair Powell’s comments at the central bank’s annual Jackson Hole Symposium.
Political Pressure
US President Donald Trump has been prodding Fed policymakers to cut interest rates for months. Several Fed governors, including Christopher Waller and Michelle Bowman, have expressed support for cutting rates. Regional bank presidents, such as San Francisco’s Mary Daly and Atlanta’s Raphael Bostic, have also expressed limited support for a September cut.
Opposition to Rate Cuts
Not all Fed policymakers favor lowering rates this month. Cleveland Fed president Beth Hammack has said that inflation remains too high to cut rates this month. However, Hammack is not a voting member of the Fed’s rate-setting committee until next year.
Conclusion
In conclusion, the US Federal Reserve is expected to cut interest rates twice this year, in September and December, based on weak August employment data. The new forecast aligns with market expectations and most other Wall Street views. While there is political pressure to cut interest rates, not all Fed policymakers favor lowering rates this month. The decision to cut interest rates will depend on various factors, including inflation and labor market data.
