Will the FED cut interest rates this year or not? Bank of America predicts two "opposite scenarios": The key period is in late summer!

According to two economists from BofA Global Research, the US economy and monetary policy could follow two distinctly different paths in 2025.

BofA economists Aditya Bhave and Shruti Mishra stated in their latest report released on Tuesday,assuming the labour market remains stable, US President Trump's tariffs may reignite inflation, thereby preventing the US Fed from cutting interest rates in 2025. This is their current baseline scenario.

In contrast, the BofA research team noted that if economic issues arise, they are likely to emerge before late summer this year, potentially leading to a completely different interest rate trajectory.

They wrote: "We view the outlook as two-sided. If the labour market remains stable as we expect, tariff-driven inflation could be sufficient to deter the Fed from cutting rates. But ifthe economy collapses, we believe it would occur during the summer."

"Should the latter scenario materialize,we expect the Fed to swiftly cut rates by 75 basis points starting from September." they added.

Last week, the US Fed maintained its "wait-and-see" stance, keeping the federal funds rate target range unchanged at 4.25%-4.5%, while indicating significant uncertainty remains regarding the economic impact of President Trump's tariffs. This marks the fourth consecutive meeting where the Fed has held rates steady after cutting them by 100 basis points last year.

Officials' latest projections show they anticipate economic growth will slow down, inflation will rise, unemployment will increase, and views on the rate outlook remain divided. The newly released "dot plot" also revealed internal Fed divisions: while the median projection still maintains two rate cuts this year, the number of policymakers forecasting no cuts in 2025 increased from four to seven. Meanwhile, officials predicting at least two rate cuts this year decreased by one compared to three months ago.

Simultaneously, recent comments from Fed officials have split into two camps: the "wait-and-see camp" and the "July rate-cut camp." The "wait-and-see camp," led by Powell, advocates "further assessing the impact of Trump's tariffs," while Fed Governor Waller and Vice Chair for Supervision Bowman expressed support for a July rate cut, believing tariffs may only temporarily boost inflation.

However, according to the BofA research team, the median projection typically interpreted by markets as reflecting the central bank's baseline forecast is relatively inaccurate. This forecast scenario relies on a "Goldilocks" economic environment: one with mild inflation and a labour market that is cooling slightly but not weakening significantly.

On Wall Street, the term "Goldilocks" is used to describe an ideal economic state that is neither too hot nor too cold. However, Bank of America believes this scenario is unlikely to occur.

Bank of America economists pointed out that, the historical record of the median "dot plot" from the US Fed in accurately predicting interest rate movements has not been ideal. They examined the accuracy of the Fed's June forecasts in predicting interest rate movements later in the year.

"At the June meetings in 2019, 2022, and 2024, not a single FOMC participant correctly predicted policy changes for the remainder of the year. Forecasting is particularly challenging during periods of rising economic uncertainty. The unclear outlook for the economy and the labour market makes forecasting especially difficult," they wrote.