Market Pricing and Policymaker Rhetoric
Investors' expectations could change quickly despite cautious rhetoric from policymakers, Bank of America (BofA) analyst Aditya Bhave warned in his latest note.
“We wouldn’t be surprised if markets start pricing in the prospect of a January cut more aggressively in the near term,” Bhave said in the bank’s US Economic Weekly report.
December Rate Cut Expectations
Markets have largely priced in a 25 basis point rate cut at the December meeting. BofA also stated that the Fed would take this step in December, reminding the central bank that it had already “signaled a 25 basis point cut.” However, analysts said this cut would be supported by firmer communication and that they expect a “hawkish tone shift in forward guidance” in the statement.
BofA's Economic Projections
BofA predicts there could be three dissenting votes at the December meeting. It also predicts that economic projections will see upward revisions to 2025–2026 growth estimates, slightly upward revisions to the unemployment rate, and downward revisions to inflation. These adjustments are expected to help the Fed justify its December cut.
According to the bank's forecast, the median dot plot will point to two interest rate cuts for 2026, followed by a long pause.
Jerome Powell's Challenge
BofA, however, believes Fed Chair Jerome Powell may struggle to prevent the market from pricing in further easing. “Given the volume of data due before the January meeting, we believe it will be difficult for Powell to remain convincingly hawkish at his press conference,” the note said.
Bhave noted that Powell could try to emphasize the need for “a significant weakening in employment data” to justify further rate cuts, or argue that the policy rate is “not truly restrictive” in the 3.5%-3.75% range. However, despite all this, the bank believes markets will continue to focus heavily on upcoming economic data.
The analyst noted that Powell “cannot avoid data dependency,” adding that markets are ready to react quickly to newly released indicators. This could pave the way for more aggressive pricing in interest rate cut expectations as we approach the January meeting.