Bank of America has significantly revised its outlook on the Federal Reserve’s monetary policy, now projecting multiple interest rate cuts this year and into 2026. This recalibration stems from a confluence of recent economic data, most notably a softer U.S. labor market report for August, and shifting signals from the Fed’s leadership, suggesting a renewed emphasis on employment stability.
Previously, Bank of America did not anticipate any rate adjustments in 2025. However, the updated forecast now includes two quarter-point rate reductions this year, followed by three additional cuts in 2026. According to economist Aditya Bhave, the initial rate reduction is expected at the Fed’s September 17-18 meeting, with a subsequent cut in December. Bhave indicated that persistent inflationary pressures preclude a move in October.
A primary driver for this revised projection is the latest U.S. jobs report, which showed a mere 22,000 new positions created in August. This figure sharply contrasts with previous trends, reinforcing concerns about a potential cooling in labor demand. Such a slowdown could provide the impetus for the Fed to ease monetary conditions sooner than anticipated.
Further supporting Bank of America’s pivot is the recent discourse from Federal Reserve Chair Jerome Powell at Jackson Hole. Powell’s remarks, suggesting that current economic conditions “could justify” an adjustment in monetary policy, were widely interpreted as a signal that the Fed is increasingly prioritizing the strength of the labor market. This interpretation aligns with Bhave’s analysis, indicating a strategic shift from an inflation-centric focus to one that balances inflation control with employment objectives.
Despite Bank of America’s updated stance, its forecast remains less accommodative than broader market expectations. While the institution projects two cuts in 2025, financial operators are largely pricing in three reductions, with some even anticipating a more aggressive half-point cut in September. The ultimate trajectory of interest rates will hinge on the ongoing interplay between inflation, employment figures, and overall market stability, particularly as the Fed has maintained its current rate since December 2024.
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