Bank of America Expects Fed to Cut Rates in September Due to Weak Labor Market

Bank of America Securities expects the Federal Reserve to start cutting interest rates in September due to a weak labor market. BofA economist Aditya Bhave believes the Fed will pivot from fighting inflation to supporting the cooling labor market. The decision to cut rates comes as a response to the current economic conditions.

Bank of America Securities (BofA) has forecasted that the Federal Reserve will commence interest rate cuts in September, citing a weak labor market as the primary catalyst. In a recent note published on Friday, economist Aditya Bhave stated that the disappointing August jobs report has solidified a shift in the Fed's focus, with rising unemployment and sluggish wage growth outweighing concerns about inflation [2].

The August employment report revealed a slowdown in job creation, with the jobless rate rising to 4.3% and hours worked declining, which has led to a decrease in household income. These figures, according to Bhave, provide clear evidence of a deterioration in labor demand, prompting BofA to abandon its earlier view that the Fed would hold rates steady through year-end. The bank now expects quarter-point cuts in September and December, followed by a further 75 basis points of easing in 2026, bringing the federal funds rate down to a terminal range of 3.00% to 3.25% [2].

The Fed's decision to cut rates comes as a response to the current economic conditions, which have been characterized by a cooling labor market and inflation concerns. Until now, the Fed has been torn between keeping rates high to combat inflation and lowering them to prevent unemployment from rising. The recent jobs data has tipped the balance in favor of prioritizing employment, as the Fed now appears to be tilting from an inflation-first stance toward supporting the labor market [2].

The Federal Reserve is expected to cut its benchmark interest rate at its next meeting on September 16-17, with a 14% chance of a super-sized cut of 50 basis points, according to the CME Group's FedWatch tool [1]. This certainty has sparked markets to price in a 14% chance of a 50 basis point cut, with the benchmark rate potentially falling to a range of 3.75% to 4%. As recently as last week, markets were pricing in a likelihood of a 25 basis-point cut, with an outside chance the Fed held rates steady [1].

BofA continues to expect a more accommodative approach once Chair Jerome Powell steps down, projecting an additional 75 basis points of cuts spread across June, September, and December 2026. That outlook lifts the bank's forecast for cumulative easing by end-2026 to 125 basis points [2].

References:
[1] https://finance.yahoo.com/news/jobs-report-seals-federal-interest-153228448.html
[2] https://seekingalpha.com/news/4492887-bank-of-america-sees-fed-starting-rate-cuts-in-september-citing-weak-labor-market