Bank of America (BofA) predicts that no further interest rate cuts will occur during Federal Reserve Chair Jerome Powell's tenure.
According to trading desk sources, BofA has issued one of Wall Street's most aggressive forecasts, suggesting the FOMC will refrain from additional rate cuts under Powell's leadership—a stark contrast to market expectations of a December rate cut.
This bold projection comes after the Fed's October rate cut was followed by Powell's cautious remarks, stating that another December cut is "far from certain." Meanwhile, the ongoing U.S. government shutdown has delayed critical economic data releases, leaving both the Fed and investors in a "fog" of uncertainty.
Amid this "data vacuum," market focus has shifted to alternative indicators. BofA's analysis suggests these signals paint a complex but not pessimistic picture: the labor market is gradually cooling without signs of sharp deterioration. This scenario provides the Fed with justification to pause rate cuts and forms the basis for BofA’s hawkish outlook.
**Decision-Making in a Data Void** The lack of official data due to the government shutdown has become the primary uncertainty affecting Fed policy and market expectations. Key October reports—CPI, PPI, and retail sales—will be delayed, depriving the Fed of direct inflation and consumption insights ahead of its December meeting.
Chair Powell likened the current policy dilemma to "driving in fog" at October’s press conference, emphasizing that without fresh official data and if alternative indicators remain stable, pausing action would be "a strong argument." BofA interprets this as raising the bar for a December cut, requiring data to "justify" rather than merely "not oppose" further easing.
Recent Fed official commentary aligns with this caution. BofA notes their communications lean "slightly hawkish," with policymakers like Goolsbee, Hammack, Logan, and Schmid expressing inflation concerns or reservations about additional cuts. Even typically dovish voices, including Daly and Cook, stopped short of endorsing a December move.
**Alternative Data Reveals Labor Market Trends** With official metrics unavailable, alternative data has become crucial for gauging economic health. BofA’s "Alternative Labor Market Heatmap" indicates the U.S. job market is in a "low-churn" state—gradually loosening but not collapsing.
*Hiring Remains Weak*: Job seekers still face challenges. The Chicago Fed’s estimated hiring rate fell for a sixth straight month in October, while Challenger data shows corporate hiring plans for September-October fell significantly short of 2023 levels.
*Controlled Layoffs*: Sluggish hiring is offset by historically low layoffs. Though high-profile job cuts at Amazon and UPS sparked alarm, BofA views these as isolated events. More critically, initial jobless claims remain benign. The bank’s internal data shows a 10% year-over-year rise in unemployment benefit recipients in October—a slower pace than September, suggesting no acceleration in job losses.
*Wage Pressure Eases Marginally*: Wage growth, a lagging indicator of labor balance, shows cooling signs. ADP data reveals slowing pay gains for job switchers, while Indeed’s wage tracker continues decelerating.
BofA asserts unemployment will be the Fed’s decisive factor. Its rule of thumb: if joblessness stays at or below 4.3%, or rises very slowly, further cuts are unlikely. Only a climb to 4.5% in coming months could pave the way for at least one more reduction.
**Hawkish Voices Grow as Fed Turns Cautious** BofA’s review of recent Fed speeches concludes the overall tone is "modestly hawkish," reinforcing its "pause" call.
Cleveland Fed’s Hammack openly worries about "still-high inflation," projecting a 2026 timeline for returning to 2%. Chicago’s Goolsbee expressed "nervousness" about price pressures, while Dallas’ Logan and Kansas City’s Schmid doubted December cuts, with the latter calling the labor market "balanced" and inflation "still too high."
Notably, even dovish officials like San Francisco’s Daly struck less accommodative tones, and Governors Cook and Barr avoided committing to December easing. This collective caution has dampened expectations for consecutive cuts.
**Updated Economic Projections** BofA revised its core forecasts, adopting a more hawkish stance than consensus:
*Fed Policy*: No further cuts under Powell. The federal funds rate will hold at 3.75-4.0% through 2025, with three 25-bp reductions possible in H2 2026 under a new chair, lowering rates to 3.00-3.25%.
*Inflation*: Tariff-driven input costs will keep inflation elevated. Core PCE is projected to hover near 3% year-over-year from Q4 2025 to Q2 2026.
*Labor Market*: Job markets will cool mildly, with unemployment rising 0.1% quarterly to 4.4% by Q4 2025, peaking at 4.5% in 2026.
*Growth*: A "constructive" U.S. outlook expects 1.8% GDP growth in 2025 as fiscal stimulus takes effect and uncertainty fades.
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