① Bank of America economists predict that, by 2025, the U.S. economy and monetary policy may follow two completely different paths; ② one is a stable labor market, with tariffs causing inflation to rise again, preventing the Federal Reserve from cutting interest rates; the other is an economic issue, which may lead the Federal Reserve to quickly cut rates by 75 basis points.
According to Bank of America Global Research two economists' statements on June 25, the U.S. economy and monetary policy may have two entirely different paths by 2025.
Bank of America economists Aditya Bhave and Shruti Mishra stated in a report released on Tuesday that, assuming the labor market remains stable, President Trump's tariffs may cause inflation to rise again, thereby preventing the Federal Reserve from cutting rates in 2025. This is their current baseline expectation.
In contrast to this expectation, the Bank of America research team pointed out that if there are any economic problems, they are likely to occur before the end of this summer, which could lead to a significantly different trend in interest rates.
They wrote: "We believe the outlook is bidirectional. If the labor market remains stable as we expect, tariff-driven inflation may be sufficient to prevent the Federal Reserve from cutting rates. But if the economy collapses, we believe it will happen in the summer."
"If the latter scenario comes true, we expect the Federal Reserve will begin cutting rates rapidly by 75 basis points starting in September," they added.
Last week, the Federal Reserve continued to 'stay put,' keeping the target Range for the federal funds rate unchanged at 4.25%-4.5%, and hinted that the impact of President Trump's tariffs on the economy still carries a great deal of uncertainty. This is the fourth consecutive meeting the Federal Reserve has kept rates unchanged after cutting them by 100 basis points last year.
The latest forecasts from officials show that they expect economic growth to slow down, inflation to rise, the unemployment rate to increase, and there are also differences in views regarding interest rate prospects. The latest released "dot plot" also reveals conflicts within the Federal Reserve: while the median expectation remains at two interest rate cuts this year, the number of committee members predicting no cuts this year has increased from four to seven. At the same time, the officials forecasting at least two rate cuts this year has also decreased by one compared to three months ago.
Meanwhile, the statements of Federal Reserve officials in recent days have revealed two factions: the "wait-and-see" camp and the "rate cut in July" camp. Led by Powell, the "wait-and-see" camp advocates for "waiting to see what impact the Trump tariffs will have," while Fed Governor Waller and Vice Chair Bowman, who oversees regulation, support a rate cut in July, believing that the tariffs may only push inflation up once.
However, according to the research team at Bank of America, expectations typically interpreted by the market as reflecting the central bank's median forecast are not very accurate. This is because such a forecast scenario relies on a "Goldilocks" economic environment: one where inflation is moderate, and the labor market slightly cools without significantly weakening.
On Wall Street, "Goldilocks" is used to describe an ideal economic state that is neither too hot nor too cold. However, Bank of America believes this situation is unlikely to occur.
Bank of America economists point out that the historical record of the Fed's "dot plot" median in accurately predicting interest rate trends is not ideal. They studied the accuracy of the Fed's prior predictions from June regarding interest rate trends later that same year.
"In the meetings of June in 2019, 2022, and 2024, not a single FOMC participant correctly predicted policy changes for the remainder of that year. During periods of rising economic uncertainty, predictions are very difficult. The unclear outlook for the economy and labor market makes forecasting especially challenging," they wrote.
