Bank of America is reaffirming its view that the Federal Reserve will deliver two rate cuts in 2026, arguing in a client note that the central bank's growing tolerance for supply-driven price rises, an absence of clear wage inflation and political forces will ultimately tilt policy toward easing despite nearer-term inflationary signs.
U.S. economist Aditya Bhave acknowledged that recent revisions at BofA point to slightly weaker growth and somewhat higher inflation, but he said those adjustments do not change the firm's outlook on policy.
"We still expect cuts this year given the Fed's bias to look through supply-driven inflation, little signs of wage pressures, and political pressure," Bhave wrote.
BofA highlighted timing as a factor in its forecast, noting that by September the Fed's incoming chair, Kevin Warsh, should be in place and have had time to observe additional data suggesting inflation is easing. The bank conceded that risks are skewed toward a scenario with no cuts, yet it kept its central forecast intact.
The March Federal Open Market Committee minutes, released this week, reinforced a broadly patient approach among policymakers. BofA pointed to language in the minutes showing a range of views: "A 'couple' of officials who still anticipate eventual rate cuts indicated they have pushed back the expected timing. 'Some' even suggested signaling the possibility of hikes. On the other hand, "many participants" still felt it was appropriate to lower rates 'in time'" said BofA.
On the consumption side, the bank flagged a marked slowdown in real spending. Real consumer spending increased just 0.1% month-on-month in February, translating to a 0.8% annualized pace over the prior three months. Over that same interval, headline personal consumption expenditures inflation rose at a 4.1% annualized rate, and BofA warned that energy price dynamics could continue to weigh on real spending in the near term.
While emphasizing its base case of eventual easing, BofA acknowledged uncertainties remain and that the Fed's ultimate path will depend on how incoming data, particularly on inflation and wages, evolve over the coming months.
Key points
- BofA continues to expect two Fed rate cuts in 2026 and maintains its base case despite small upward revisions to inflation and softer growth.
- Factors supporting cuts include the Fed's willingness to look through supply-driven inflation, limited signs of wage pressure, and political considerations; incoming Fed Chair Kevin Warsh could have enough evidence by September to build support for easing.
- Recent FOMC minutes show a range of views among officials, with some delaying expected cuts and others still seeing cuts as appropriate over time.
Sectors impacted
- Consumer/retail: real spending trends and headline PCE readings influence household purchasing power.
- Energy: volatility in energy prices could pressure real spending.
- Financials and interest-rate-sensitive markets: expectations about the timing of Fed cuts affect lending rates and market valuations.
Risks and uncertainties
- Risk of no cuts: BofA acknowledges downside risk that the Fed may not move to lower rates, which would affect interest-rate-sensitive sectors.
- Near-term inflation pressures: headline PCE rose at a 4.1% annualized rate over the recent three-month span, and persistent energy price pressure could keep real spending constrained.
- Data dependence and timing: the ultimate policy path hinges on incoming inflation and wage data and whether those readings convince policymakers to shift from a wait-and-see posture to decisive easing.
Note: This article is based on Bank of America's client note and the March FOMC minutes as described in that note.