Bank of America (BofA) strategists expect the Federal Reserve to cut the federal funds rate target range by 25 basis points to 4.25%-4.5% at its December meeting.
With markets already pricing in a near-full rate cut, attention is expected to shift to the Federal Reserve’s communication on its future policy direction.
BofA expects the Summary of Economic Projections (SEP) and Chairman Jerome Powell’s remarks at the press conference to signal a slower rate cut in the future, with a possible pause in January if economic data is in line with expectations.
The FOMC statement is expected to remain largely unchanged, despite signs of recent stalled inflation progress.
BofA emphasized that recent inflation shocks have been concentrated in the goods sector, particularly new and used cars, which the Federal Reserve may view as temporary.
Meanwhile, housing inflation appears to be holding steady at levels consistent with the Federal Reserve’s 2% target, and November PCE inflation is expected to remain subdued based on CPI and PPI trends.
In the SEP, BofA said the focus will be on the 2025 median dot plot. In September, the median projection showed a 100 basis point rate cut in 2025. Given that inflation remains resilient and economic activity remains strong, the bank’s analysts believe the median projection will rise, indicating smaller cuts.
“Despite this recent rigidity, we expect the median to show three cuts in 2025, two in 2026, and none in 2027. This would raise the 2025-plus policy rate projection by 25 basis points compared to the September estimate,”- Mark Cabana.
Recent comments from Federal Reserve officials also suggested a reassessment of the neutral rate. Analysts expect the long-term median rate to rise by 25 basis points to 3.125%.
