Fed Won't Cut Rates Until 2027, Says Bank of America

Bank of America Predicts Delayed Rate Cuts Until 2027

Bank of America has revised its prediction regarding the Federal Reserve's interest rate decisions, suggesting that the central bank will not lower rates this year and may instead wait until the second half of 2027. This shift comes as a result of strong inflation and resilient job growth, which have complicated the Fed's outlook.

Previously, Bank of America Global Research had anticipated two rate cuts in September and October of this year. This expectation was partially based on the assumption that Kevin Warsh, President Trump’s nominee to replace Jerome Powell as Fed chair, would encourage policymakers to ease monetary policy. However, recent economic developments have led the firm to change its stance.

In a note to clients released on Friday, economists from the financial institution stated, “We no longer expect the Fed to cut rates this year.” They highlighted that various economic shocks, including the ongoing conflict in Iran, increased tariffs, and the rise of artificial intelligence, are making it more challenging to predict future interest rate movements.

Bank of America is not the only entity expecting the Fed to maintain its current stance. According to the CME Group's FedWatch tool, which reflects market sentiment, there is less than a 50% chance of rate cuts before the second half of 2027.

Factors Impeding Rate Cuts

Several factors could contribute to the delay in rate cuts, according to Bank of America Global Research. First, while Kevin Warsh has indicated openness to easing borrowing costs, several Fed officials remain hesitant to reduce rates. For example, Federal Reserve Bank of Chicago President Austan Goolsbee and St. Louis Fed President Alberto Musalem have recently expressed concerns that AI-driven productivity gains could lead to increased spending and potentially overheat the economy.

Second, the Fed is dealing with rising inflation, which currently stands at 3.3%, significantly above its 2% annual target. Inflation has surged since the start of the Iran war, driven by higher energy prices. While rate cuts can stimulate economic growth, they also risk fueling inflation further.

“Core inflation is too high, and moving up,” Bank of America Global Research noted in its report, adding that rate cuts are more likely in the second half of 2027 as inflation begins to decline.

Deutsche Bank economists also anticipate that consumer prices will stay above the Fed’s 2% annual target for the next year. “Trend inflation has not shown clear signs of dipping below 3%,” they stated in a May 8 note to investors, citing ongoing inflationary pressures such as the impact of tariffs and AI-driven increases in the cost of computer hardware and software.

Solid Job Growth

A stronger-than-expected jobs report released on Friday has further weakened the case for rate cuts, according to Bank of America Global Research. Employers added 115,000 jobs in April, surpassing forecasts of 65,000 payroll gains. With data indicating a steady job market, Wall Street analysts suggested on Friday that the Fed will prioritize controlling inflation.

How Interest Rate Cuts Are Decided

Interest rate cuts are determined by a 12-member panel known as the Federal Open Market Committee (FOMC). The last time the central bank reduced rates was in December 2025, when it lowered the federal funds rate by a quarter of a percentage point. Since then, the federal funds rate has remained within its current range of 3.5% to 3.75%.