Bank of America's Anticipated Interest Rates for the Years 2025-2026
In a significant shift, Bank of America has revised its forecast for the U.S. economy, predicting three more interest rate cuts in 2026. This change is primarily due to the annual revision of U.S. employment data, which indicates a weaker labor market, particularly in the professional services and leisure sectors.
The job growth and unemployment rates, wage pressures, inflation trends, GDP, and consumer confidence are all indicators of a cooling economy that sparked this change. The August jobs report showed only 22,000 jobs were added, way below expectations, leading to an unemployment rate rise to 4.3%.
The Federal Reserve's federal funds rate has been steady at 4.25%-4.50% throughout 2025, influencing many other interest rates. However, Bank of America now expects the Federal Reserve to cut interest rates twice in 2025, specifically in September and December.
Goldman Sachs and Morgan Stanley have also joined the prediction, with Goldman Sachs forecasting 50 basis points of cuts, and Morgan Stanley predicting 75 basis points of cuts in September, December, and potentially a third. The CME's probabilistic prediction is for 75-100 basis points of cuts. J.P. Morgan predicts a total of 100 basis points of cuts by Q1 2026.
The expected cuts are for 25 basis points each, bringing the federal funds rate down to 3.75%-4.00% after the September cut and 3.50%-3.75% after the December cut. Lower rates make it cheaper for businesses to borrow, encouraging investment.
Sectors such as Housing and Consumer spending are likely to jump due to rate cuts. Mortgage rates could dip below to around the low 6% due to these rate cuts. This could stimulate the housing market, leading to increased home sales and construction.
However, Bank of America's updated forecast does not expect super-aggressive easing due to inflation being almost 3%. The Fed's head guys have grown to be 'dovish' or more considerate of lowering the rates, indicating a possibility of gradual cuts in the future.
This situation is similar to past cycles where the Fed paused rate hikes to tame inflation. The Consumer Price Index (CPI) has been around 2.5% year-over-year, and average hourly earnings have been gradually decreasing, with a 0.2% monthly rise and 3.9% annual rise.
In conclusion, major banks are predicting interest rate cuts due to a slowing economy and a weaker labor market. These cuts could stimulate sectors such as Housing and Consumer spending, but the Fed is expected to tread carefully to control inflation.
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