Wall Street's "last hawkish" surrenders! Bank of America bets on the Fed cutting interest rates in September and December, shouting "No rate cuts all year".

Economists at Wall Street financial giant Bank of America Corp. predict that based on unusually weak August non-farm payroll data, the Federal Reserve will announce two interest rate cuts this year - expected in September and December. Bank of America has completely abandoned the hawkish monetary policy expectation that investors once saw as an "outlier" on Wall Street, that is, Bank of America has long maintained the expectation that the Fed will not take action to cut interest rates until next year. Now, with significant cracks appearing in the labor market and multiple data showing that the US economy may be sharply slowing down, Bank of America has completely abandoned the hawkish expectation of "no rate cuts for the whole year." "There is now clearer evidence that labor demand is continuing to deteriorate, not just supply," Bank of America economists led by Aditya Bhave said in a report. Bank of America's new forecast also includes a policy of cutting rates by 25 basis points three times starting in June 2026, meaning the Fed may significantly lower its policy rate target range from 4.25%-4.5% to 3%-3.25% by next year. In terms of inflation expectations, Bank of America economists predict that inflation in the US, as measured by the Fed's preferred inflation index - the core personal consumption expenditures (core PCE) index, may reach 3% in August due to tariff transmission effects. They also expect it to rise further by the end of the year, forcing the Fed to pause interest rate cuts in October and choose to hold steady temporarily. Bank of America's economists' new 2025 monetary policy forecast is in line with market expectations and the views of major Wall Street investment institutions. Following the significantly weaker-than-expected August non-farm payroll data released on Friday, the probability of a Fed interest rate cut in September is now fully priced in, and pricing for the possibility of 25 basis point cuts at the remaining three monetary policy meetings this year is more aggressive. The employment report shows that the number of non-farm payrolls in August increased by only 22,000, compared to a median estimate of 75,000 by economists. The unemployment rate in August rose to 4.3%, the highest since 2021, in line with the median estimate of economists. In addition, the already very weak non-farm payroll figures for June and July were revised downwards by a total of 21,000, with June's employment data revised to negative growth - the first monthly decline in employment numbers since 2020. This has led some interest rate futures traders to leave room for predicting a larger cut of half a percentage point and now expect the Fed to implement more accommodative measures by the end of 2025. "These are two disappointing employment reports in a row, undoubtedly providing important evidence of a slowdown in the US economy," said Jack Ablin, founding partner and chief investment officer at Cresset Capital. "When you combine this with Fed Chair Powell's inclination towards full employment rather than price stability, it does suggest that the Fed may take actions beyond its original plans." Among major Wall Street investment institutions, only Bank of America had not predicted that the Fed would resume interest rate cuts in September before the release of the August non-farm payroll data on Friday. Since the beginning of this year, Bank of America has consistently held the position of "the Fed will not cut rates all year," making it an outlier on Wall Street. Since April, Bank of America's official forecast has been that the Fed will not take any rate cut action until the second half of next year, with an expected relaxation of 100 basis points at that time. However, Bank of America's economists last month already based on comments made by Fed Chair Powell at the Jackson Hole Global Central Bank Symposium on August 22, acknowledging that "the risks have clearly shifted towards starting rate cuts in September." Earlier this week, on September 3, they stated that in the background of a labor market slowing due to supply drive, core inflation hovering around 3%, and the economy accelerating re-expansion, "a rushed rate cut by the Fed may turn into a policy mistake." For months, US President Donald Trump has been urging Fed policymakers to cut rates quickly, with two governors already leaning towards a rate cut stance. His two appointees to the Fed Governors - Christopher Waller and Michelle Bowman - voted against holding steady in July and supported a rate cut instead. Since then, regional Fed presidents including Mary Daly of the San Francisco Fed and Atlanta Fed Chair Raphael Bostic have also expressed at least dovish support for a rate cut in September. However, not all Fed policymakers support a rate cut this month. Cleveland Fed President Beth Hammack stated that inflation is still too high, making it difficult for the Fed to cut rates this month. However, Hammack will not be a voting member of the Fed's FOMC monetary policy committee with policy decision-making rights until next year.