Federal Reserve Will Not Cut Interest Rate This Year, BOA Says

Bank of America, previously anticipating two quarter-point reductions in the Federal Reserve’s benchmark interest rate during 2025, has now completely withdrawn its forecast for any rate cuts this year.

This dramatic reversal highlights a changing perception of the economic climate, primarily driven by stronger-than-anticipated employment data released in December. The revised outlook even suggests the possibility of a future rate hike, a stark contrast to the previously held expectations.

BOA not Optimistic About 2025 Fed Rate Cut

This recalibration is not isolated to Bank of America. Citigroup, while maintaining a more optimistic view than most Wall Street firms, has adjusted its projection. Previously calling for a rate cut as early as January, Citigroup now anticipates the commencement of rate reductions in May, with five quarter-point cuts foreseen throughout the year.

Goldman Sachs, too, has tempered its forecast, now predicting two rate cuts in 2025, down from its previous projection of three. These downward revisions highlight a widespread reassessment among economic forecasters regarding the trajectory of Federal Reserve policy.

The Federal Reserve itself has also significantly altered its projections, reflecting a more cautious approach. The central bank’s latest forecast anticipates only two rate cuts in 2025, a considerable reduction from the four projected in September.

This shift is accompanied by an upward revision of the projected federal funds rate, now anticipated to reach a median level of 3.9% by the end of 2025, up from the earlier forecast of 3.4%. Furthermore, the Fed’s inflation projection for 2025 has also increased to 2.5%, compared to the September forecast of 2.1%.

Federal Reserve Third Rate Cut in 2024

The Federal Reserve’s recent actions further support this analysis. In its December meeting, the Fed announced its third consecutive interest rate cut of 2024, reducing its benchmark rate by 0.25 percentage points.

While this offered relief to borrowers, the accompanying projection for fewer rate cuts in 2025 sent shockwaves through the market, leading to significant declines in major indices such as the S&P 500 and the Dow Jones Industrial Average. Market analysts have emphasized that this reaction reflects a focus on the reduced future rate-cut expectations rather than the immediate positive impact of the current cut.

Federal Reserve Chairman Jerome Powell acknowledged the slower-than-expected progress in reducing inflation to the central bank’s 2% target. This slower progress, coupled with the robust economic performance, underpins the Fed’s decision to adopt a more gradual approach to easing monetary policy in 2025.