Bank of America (BofA) Global Research expects the US Federal Reserve to reduce interest rates by 25 basis points at its December meeting, citing weak labour market conditions and dovish signals from policymakers. The brokerage had previously forecast borrowing costs to remain unchanged.
Analysts at BofA noted that two additional quarter-point cuts could follow in 2026, in June and July, potentially bringing the terminal rate to 3.00%-3.25%. “Our forecast of additional cuts next year is due to the change in leadership, not our read on the economy,” BofA said, referring to White House economic adviser Kevin Hassett, who has emerged as the frontrunner to become the next Fed chair.
The shift in expectations follows comments from key Fed officials, including New York Fed President and FOMC Vice Chair John Williams, which have fuelled speculation of an earlier rate cut. “By cutting rates next week, we think the Fed would increase the risk of pushing policy into accommodative territory, just as fiscal stimulus kicks in,” BofA added.
Traders are largely pricing in an 87.6% chance of a 25-basis-point reduction in December, according to CME Group’s FedWatch Tool. Most major brokerages anticipate a cut next week, although some, including Morgan Stanley and Standard Chartered, expect the Fed to hold rates steady.
The Federal Reserve’s policy meeting is scheduled for December 9 and 10, and market participants are closely watching for any indications of the central bank’s stance on interest rates for the year ahead.
