The inflation fight has stalled and the first rate cut won't happen until December, Bank of America says
"The acceleration of inflation this year makes a cut prior to December challenging, in our view," the team led by Michael Gapen said in the note.
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- Bank of America pushed back its forecast for the first rate cut of 2024 from June to December.
- The bank adjusted its call following the hotter-than-expected March inflation report.
- The re-acceleration of inflation means markets should expect just a single 25 basis-point cut this year.
The recent string of unexpectedly high inflation readings has led Bank of America to push back its forecast for the first rate-cut of 2024 from June to December.
BofA's US economics team wrote in a note on Thursday that they don't feel policymakers will be confident enough by June to begin loosening monetary policy, though they maintained their expectations for four cuts in 2025 and two in 2026.
"The acceleration of inflation this year makes a cut prior to December challenging, in our view," analysts led by Michael Gapen write, citing the first quarter core CPI inflation, which rose to 4.5% annually from 3.3% in late 2023. Meanwhile, expectations for inflation in the near term remain high.
"We think this rationale also rules out cuts that start in July or September. We just don't see enough progress on inflation and its components by then. Moreover, unfavorable base effects mean year-over-year core PCE inflation will probably not decline further between the June and September meetings," the note said.
The bank said that by December, while the year-on-year rate of core PCE inflation is expected to be 2.8%, sequential growth rates in shelter inflation are likely to show more convincing signs of cooling, and inflation expectations are likely to start steadily declining by that point.
"As a result, the Fed could find reason to begin easing rates in December. This would mean one-25bp rate cut this year, instead of our previous forecast of 75bp in rate cuts," analysts added.
A number of banks adjusted their forecasts for rates following the release of March CPI. Goldman Sachs slashed its outlook from three to two cuts, while RBC said just one is in the cards.
On Wednesday, Larry Summers, the former US Treasury Secretary, said there are rising odds that the Fed's next rate move is upward after inflation came in hot for the third month running.