Bank of America sees two 2025 Fed rate cuts vs none previously

Bank of America sees two 2025 Fed rate cuts vs none previously

Bank of America has revised its expectations for Federal Reserve rate cuts in 2025, now forecasting two cuts compared to no cuts previously anticipated. This shift in outlook reflects the evolving economic landscape and the Fed's ongoing efforts to manage inflation and unemployment.

Markets are currently pricing in an 87% chance of a 0.25% Fed rate cut at the September 2025 meeting, with a total of 2.5 cuts projected by early 2026 [3]. This represents a significant change from the previous stance, which did not anticipate any rate cuts for the year. The Fed's decision to keep rates steady at 4.25–4.5% in July 2025, despite dissenting opinions, highlights the central bank's cautious approach to rate cuts.

The Fed's dilemma is evident in the core CPI at 3.1% and core PPI at 3.7%, which keep inflation above the 2% target [3]. The August 2025 FOMC minutes revealed a divided board, with governors Christopher Waller and Michelle Bowman dissenting against the status quo [3]. This internal friction underscores the Fed's balancing act: cutting rates to support a cooling labor market while avoiding a repeat of the 2021–2022 inflation surge.

The anticipated rate cuts are expected to have a muted impact on mortgage rates initially, with the first cut in September likely to be just 25 basis points [2]. However, multiple rate reductions could lead to more significant cooling in the mortgage rate climate over time. Borrowers are advised to improve their credit scores, lower their debt-to-income ratios, and shop around for rates and lenders to better position themselves for lower mortgage rates.

Investors should also consider the sector rotation implications of the rate cuts. Energy, financials, and small-cap stocks (Russell 2000) are likely to benefit, while utilities and healthcare may face outflows [3]. The "Magnificent 7" tech giants have already outperformed in the current easing cycle, and further rate cuts could provide additional tailwinds for growth stocks [3].

However, investors should remain vigilant about risks from U.S. tariffs and stagflation pressures. Allocations to gold, inflation-linked bonds, and defensive sectors can help hedge against these risks. The Federal Reserve's policy pivot is heating up, and investors need to adjust their portfolios accordingly.

References:
[1] https://finance.yahoo.com/news/bank-america-moves-capture-rising-133332931.html
[2] https://www.cbsnews.com/news/how-low-will-mortgage-rates-fall-september-2025-fed-rate-cut/
[3] https://www.ainvest.com/news/fed-rate-cuts-horizon-navigating-sector-rotation-2025-2509/