Bank of America Sees Fed Cutting Rates 25bp in December While Slowing Future Policy Adjustments

The Federal Reserve is likely to reduce interest rates by 25 basis points at its December meeting, according to Bank of America strategists, who predict slower cuts in 2025 amid persistent inflation and resilient economic data.

Fed Poised for 25bp Rate Cut in December

When the Federal Reserve meets in December, strategists at Bank of America predict that the target range for the Fed funds rate will be decreased by 25 basis points to 4.25%-4.5%.

Markets are already pricing in a rate decrease of nearly full magnitude, so the Federal Reserve's announcements about its future policies will likely take center stage.

Powell's Comments and Projections Signal Slower Rate Cuts

In January, if economic data matches forecasts, the BofA anticipates that Chair Jerome Powell's statements at the press conference and the Summary of Economic Projections will indicate a slower rate of cuts ahead.

Per Investing.com, despite recent indications of stagnation in inflation, the language of the FOMC statement is expected to stay mostly unchanged.

Inflation Surprises Focused on Goods Sector

The Fed may see the recent inflation surprises, which have mostly affected the goods sector—specifically, new and used cars—as transient, as pointed out by BofA.

Meanwhile, it seems that housing inflation has leveled out at rates in line with the Fed's 2% target, and if CPI and PPI patterns hold, November PCE inflation should be low as well.

Median Dot Plot for 2025 Likely to Rise

According to BofA, the median dot plot for 2025 will be the main focus of the SEP. The median prediction for 2025 projected a 100 basis point reduction in rates in September. Bank strategists expect the median to rise, indicating fewer cutbacks, due to persistent inflation and robust economic growth.

“Despite this recent stickiness, we expect the median dots to show three cuts in 2025, two in 2026 and none in 2027. This would move the policy rate path from 2025 onwards up by 25bp, relative to the September dots,” according to strategists led by Mark Cabana in a note.

Neutral Rate Reevaluation Expected

The neutral rate may need to be reevaluated in light of recent remarks made by Fed officials. Experts predict a 25 basis point increase to 3.125% for the longer-term median rate.