Fed cutting cycle could be almost over, BofA analysts say

Investing.com — As widely expected, the Federal Reserve announced a 25 basis points (bps) rate cut at its December meeting, bringing the target federal funds rate down to a range of 4.25%-4.50%.

However, as Bank of America strategists note, this was a “hawkish rate cut” by the Fed. The Federal Open Market Committee (FOMC) statement introduced a nuanced change in its forward guidance, now mentioning “the extent and timing of additional adjustments”, instead of just “additional adjustments.”

“For us, this opens the door to the possibility that the cutting cycle is (nearly) over,” BofA strategists led by Aditya Bhave commented.

The Summary of Economic Projections (SEP) revealed a median prediction of only two rate cuts in 2025, reflecting a strong consensus among committee members. This decision was influenced by rising inflation concerns, with both headline and core Personal Consumption Expenditures (PCE) inflation forecasts for 2025 revised upward to 2.5%.

The Fed’s updated macro forecasts also indicate increased confidence in the economy, with growth projections slightly raised and the unemployment rate expected to decrease.

The distribution of risks has shifted towards higher inflation. According to BofA, this reflects the committee’s apprehensions regarding fiscal and trade policies under the Trump administration.

Moreover, the long-run median interest rate expectation was adjusted upward by 12.5 basis points to 3.0%.

During the press conference, Federal Reserve Chair Jerome Powell conveyed that a slower pace of rate cuts is now the baseline scenario, citing the labor market’s gradual cooling and the direction of inflation, which remains on a downward trajectory.

He also said, “Some people did take a very preliminary step and start to incorporate…highly-conditional estimates of economic effects of policies…”.

BofA strategists believe that if tariffs were the key driver behind inflation mark-up, they’d have expected to see a softer growth forecast for 2025.

“Powell himself does not appear to have accounted for tariffs, given that he cited significant uncertainty about the extent, timing and impact of tariffs,” they added.

BofA maintains its forecast for two additional rate cuts in 2025 but acknowledges that the likelihood has shifted towards fewer or potentially no further reductions.