Bank of America predicts the Federal Reserve will delay lowering interest rates until the second half of 2027, mainly due to strong inflation and resilient job growth.

Bank of America Global Research had previously penciled in two rate cuts this year in September and October. That view was partly based on the expectation that Kevin Warsh, President Trump's nominee to succeed Jerome Powell as Fed chair, would steer policymakers toward easing monetary policy.

But that view has changed amid a shifting economic backdrop. 

"We no longer expect the Fed to cut rates this year," economists with the financial firm said Friday in a note to clients, while noting that the multiple shocks affecting the economy, including the Iran war, tariffs and emergence of AI, are making it harder to forecast interest rate moves. 

The BofA analysts aren't alone in expecting the Fed to stand pat this year. CME Group's FedWatch tool, a measure of financial market sentiment, shows a less than 50% chance of rate cuts until the second half of 2027.

What's impeding rate cuts?

Several factors could delay Fed rate cuts, BofA Global Research said. First, although Warsh has signaled his openness to easing borrowing costs, several Fed officials remain reluctant to ease rates.

For instance, Federal Reserve Bank of Chicago President Austan Goolsbee and St. Louis Fed President Alberto Musalem have recently pushed back against cutting rates amid concerns that AI-driven productivity gains could boost spending and cause the economy to overheat.

Second, the Fed is grappling with rising inflation, which at 3.3% remains stubbornly above its 2% annual target. Inflation has jumped since the start of the Iran war due to higher energy prices. Rate cuts help stimulate economic growth but can also fan inflation.

"Core inflation is too high, and moving up," BofA Global Research said in its note, adding that rate cuts are more likely in the second half of 2027 as inflation starts to recede.

Deutsche Bank economists also expect consumer prices to remain above the Fed's 2% annual target over the next year.

"Trend inflation has not shown clear signs of dipping below 3%," they said in a May 8 note to investors, citing ongoing inflationary pressures, including the ongoing impact of tariffs and AI pushing up the cost of computer hardware and software.

Solid job growth

A stronger-than-expected jobs report released Friday also weakens the argument for rate cuts, according to BofA Global Research. Employers added 115,000 jobs in April, topping forecasts of 65,000 payroll gains.

With data showing the job market remains steady, Wall Street analysts said on Friday that the Fed will focus on taming inflation.

Interest rate cuts are decided by a 12-member panel known as the Federal Open Market Committee, or FOMC. 

The last time the central bank cut rates was in December 2025, when it lowered the federal funds rate by a quarter of a percentage point. The federal funds rate has remained in its current range between 3.5% and 3.75% ever since.