The Federal Reserve's rate cuts in June and July were expected but not justified, says Bank of America

Investing.com - Economists at Bank of America Securities say the Federal Reserve should not cut interest rates, but a rate cut seems likely to happen.

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In a report to clients on Friday, economists including Aditya Bhave and Stephen Juneau stated they expect the Fed to cut rates twice in 2026, with one cut each at the June and July meetings.

Although Kevin Warsh, a candidate nominated by President Donald Trump to be the next Fed chair, has called for significant rate reductions, Bank of America economists say such cuts are unwarranted.

They cited optimistic forecasts for the U.S. economy overall, believing economic growth will be supported by increased consumer demand and large-scale ongoing investments in artificial intelligence infrastructure.

Economists noted that recent data shows a decline in the unemployment rate, while inflation indicators favored by the Fed have risen over the past two months, “posing a challenge to rate cuts.” The latest personal consumption expenditures price index data and preliminary U.S. Q4 growth figures will be released on Friday.

However, economists pointed out that if the Federal Open Market Committee experiences “significant personnel changes” or if economic data “fluctuates,” Warsh may have enough votes to push for “several” rate cuts.

These comments came after the January Fed meeting minutes were widely interpreted as hawkish. One notable point in the minutes was that “some” participants indicated they would support a dual description of policy outlook—reflecting the possibility of rate hikes if inflation remains persistently above the Fed’s 2% target.

Last month, the Fed kept rates in the 3.5% to 3.75% range, adopting a more cautious stance after a series of rate cuts last year. CME FedWatch shows about a 47% chance of a rate cut in June.

Bank of America economists wrote, “The committee appears to have reached a consensus that downside risks to the labor market have diminished, while upside risks to inflation still exist.”

They added that since the unemployment rate has fallen to 4.3% since the January meeting, the threshold for Fed Chair Jerome Powell to cut rates at the March and April meetings is now “very high.”

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