With Fed Lowering The Rate For The First Time In 4 Years, BoA Now Expects More Aggressive Rate Cuts Through 2025

Bank of America in its latest report estimates that the Federal Reserve's expected interest rate cut for the remainder of this year will be raised to 75 basis points. Earlier the same day, as widely anticipated, the Federal Reserve initiated its first interest rate cut in four years.

On Wednesday, the Federal Reserve announced a 50 basis point rate cut, lowering the federal funds rate target range from 5.25% to 5.5% to 4.75% to 5%, a larger adjustment than usual.

Federal Reserve Chairman Powell stated that this move indicates that policymakers are trying to prevent further damage to the U.S. labor market from previous rate hikes, given that inflation has already eased while maintaining their commitment to low unemployment.

Bank of America Global Research said in a report on Wednesday that it currently expects the Federal Reserve to cut rates by another 75 basis points in the fourth quarter, whereas previous estimates were for two rate cuts of 25 basis points each at the November and December meetings.

Furthermore, Bank of America also forecasted that by 2025, the Federal Reserve might cut rates by another 125 basis points, reducing the terminal rate from the current federal funds target range of 4.75% to 5.00% to a range of 2.75% to 3.00%.

Bank of America economists believe that after a more substantial rate cut, the Federal Reserve will be forced to cut rates further.

On the same day, investment bank Goldman Sachs maintained its forecast for two rate cuts of 25 basis points each at the November and December meetings this year.

However, the bank changed its expectations for next year, with Goldman Sachs now believing that from November 2024 to June 2025, the Federal Reserve is expected to consecutively cut rates by 25 basis points at several meetings. This implies that by mid-2025, the terminal rate will reach 3.25%-3.50%, whereas the bank previously expected rate cuts on a quarterly basis in 2025.

Goldman Sachs economists said in a report on Wednesday, In our view, today's 50 basis point rate cut indicates a greater sense of urgency and the faster pace of rate cuts that most participants expect by 2025, making a longer period of consecutive rate cuts the most likely path.

What do Federal Reserve officials think? The closely watched interest rate forecast dot plot shows that 19 policymakers believe the benchmark rate will be lowered by 50 basis points by the end of 2024, by 100 basis points in 2025, and by 50 basis points in 2026. Policymakers also warned that the future outlook is inevitably uncertain.