Relief is not coming soon
In the long arc of monetary policy, patience is often the most demanding discipline. Bank of America has revised its forecast, pushing the Federal Reserve's first anticipated rate cut to late 2027, as inflation holds at 3.3% and a resilient labor market leaves little room for easing. The central bank, caught between the competing pressures of AI-driven economic momentum, persistent tariffs, and energy costs, finds itself in a familiar bind: the very strength of the economy makes it harder to offer relief to those burdened by the cost of borrowing.
- Bank of America reversed its earlier forecast of two rate cuts in 2025, now projecting the Fed will hold rates steady well into 2027 — a stark signal that the era of cheap money remains distant.
- Inflation at 3.3%, climbing energy prices, and a labor market that added over 65,000 jobs in April alone are keeping the Fed's finger off the easing trigger.
- Fed officials including Chicago's Austan Goolsbee and St. Louis's Alberto Musalem have publicly resisted rate cuts, warning that AI-fueled productivity could overheat an already warm economy.
- Tariffs and surging demand for AI-related technology are creating new inflationary pressure points, complicating the Fed's path back to its 2% target.
- CME FedWatch data shows markets now assign less than a 50% chance of any rate cut before the second half of 2027, meaning elevated mortgage, auto, and business loan costs are the foreseeable reality.
Bank of America delivered an unwelcome forecast to clients: the Federal Reserve is unlikely to cut interest rates before the second half of 2027. The reversal is striking — just months ago, the firm had anticipated two cuts this year. What changed is the stubborn persistence of economic conditions that make easing difficult to justify.
Inflation remains at 3.3%, well above the Fed's 2% target, with energy prices rising since the start of the year and tariffs continuing to push costs higher for businesses and consumers. The job market, rather than cooling, has accelerated — April alone saw more than 65,000 new positions added, exceeding expectations and signaling an economy that still runs hot.
Bank of America had previously hoped that incoming Fed leadership under Trump nominee Kevin Warsh might tilt the central bank toward easing. Instead, multiple Fed officials have moved in the opposite direction. Both Austan Goolsbee of the Chicago Fed and Alberto Musalem of the St. Louis Fed have resisted calls for cuts, pointing to the risk that AI-driven productivity gains could unleash a new wave of inflationary spending. Deutsche Bank economists, publishing their own note the same day, agreed that inflation shows no convincing path below 3% in the near term.
The CME Group's FedWatch tool now reflects this reality — markets assign less than a 50% probability to any rate cut before late 2027. The federal funds rate has sat between 3.5% and 3.75% since December 2024, and for consumers carrying mortgages, car loans, or business debt, the message is unambiguous: relief is not on the horizon.
Bank of America's economists delivered a sobering message to clients on Friday: don't expect the Federal Reserve to lower interest rates anytime soon. The financial giant has pushed back its forecast for the first rate cut to the second half of 2027—a dramatic reversal from just months earlier, when it had penciled in two cuts for this year, in September and October.
The shift reflects a harder economic reality than many anticipated. Inflation remains stuck at 3.3%, stubbornly above the Fed's 2% target, and shows little sign of retreating quickly. Energy prices have climbed since the start of the year, adding fuel to price pressures across the economy. Meanwhile, the job market continues to surprise on the upside. Employers added more than 65,000 positions in April alone, exceeding forecasts and signaling that the economy still has considerable momentum. When the labor market is this strong and inflation this elevated, the case for cutting rates—which would make borrowing cheaper and potentially stimulate even more spending—becomes harder to make.
What changed Bank of America's mind? The firm had previously believed that Kevin Warsh, President Trump's nominee to lead the Federal Reserve, would push the central bank toward easing monetary policy once he took over from Jerome Powell. But the economic backdrop has shifted dramatically. Multiple Fed officials have recently signaled their reluctance to cut rates, citing concerns that artificial intelligence-driven productivity gains could unleash a wave of spending that pushes the economy into overheating territory. Austan Goolsbee, who leads the Federal Reserve Bank of Chicago, and Alberto Musalem, the St. Louis Fed president, have both pushed back against rate cuts in recent weeks. The Fed's 12-member policy committee, known as the Federal Open Market Committee, remains divided on the path forward.
Inflation itself remains the central obstacle. Deutsche Bank economists, in a note released the same day as Bank of America's forecast, echoed the concern that price pressures show no clear sign of dropping below 3% in the near term. Tariffs continue to ripple through the economy, pushing up costs for businesses and consumers alike. The emergence of artificial intelligence as a major economic force has also created inflationary pressure in unexpected places—computer chips and related technology have become more expensive as demand surges.
The market itself reflects this skepticism about near-term rate cuts. The CME Group's FedWatch tool, which tracks financial market expectations, shows less than a 50% probability of any rate cuts until the second half of 2027. That means borrowing costs for mortgages, car loans, and business credit are likely to remain elevated for at least another year and a half. The federal funds rate, which the Fed controls directly, has been parked in a range between 3.5% and 3.75% since the last cut, which came in December 2024. Unless inflation begins a convincing descent, that's where it will stay.
For consumers and businesses already grappling with higher borrowing costs, the message is clear: relief is not coming soon. The Fed's focus has shifted entirely to wrestling inflation back toward its target, and rate cuts—the tool that would ease that burden—remain firmly off the table.
Notable Quotes
We no longer expect the Fed to cut rates this year— Bank of America Global Research economists
Core inflation is too high, and moving up— Bank of America Global Research
The Hearth Conversation Another angle on the story
Why did Bank of America change its mind so dramatically? They were expecting cuts this year.
The economy didn't cooperate with their forecast. Inflation stayed high, the job market kept adding jobs faster than expected, and Fed officials started talking more hawkishly about the risks of cutting too soon.
But doesn't a strong job market usually mean the Fed can cut rates?
Not when inflation is still elevated. The Fed is caught between two problems—they want to support employment, but they're also mandated to keep prices stable. Right now, inflation is the bigger concern.
What's the AI angle here? I keep hearing that mentioned.
Fed officials worry that AI productivity gains could unleash a spending boom that overheats the economy. If people and businesses suddenly become much more productive, they might spend more, which pushes prices up. That's the opposite of what the Fed wants right now.
So how long do consumers have to wait for relief?
If Bank of America is right, late 2027 at the earliest. That's assuming inflation actually starts falling. If it doesn't, the wait could be even longer.
What does this mean for someone with a mortgage or car loan right now?
It means the rates they're paying are likely to stay where they are for quite a while. No relief is coming soon.