BofA Forecasts Fed Rate Cut in December, Sees Additional Easing in 2026

Bank of America Global Research signaled a notable shift in monetary policy expectations on December 1, saying it now expects the Federal Reserve to reduce the federal funds rate by 25 basis points at the central bank's Dec. 9 to 10 meeting. The research team also projected two additional quarter point cuts in mid 2026, in June and in July, bringing their view of the terminal federal funds rate to roughly 3.00 percent to 3.25 percent.

BofA framed the change as driven in part by shifts in Fed leadership and by growing dovish signals from officials, rather than by a sharp deterioration in macroeconomic fundamentals. The bank cited signs of a weakening U.S. labor market as a core data input behind the adjustment. Taken together, three quarter point cuts would amount to a cumulative 75 basis point easing relative to current levels under BofA's path.

Markets reacted quickly to the note, with traders pricing in a high probability of a December move. That pricing reflects a broader recalibration in fixed income and money markets toward earlier and faster easing than many forecasters had anticipated. The expectation for rate cuts has important implications for Treasury yields, corporate borrowing costs and mortgage rates, and it typically supports higher equity valuations by reducing discount rates applied to future earnings.

Not all large brokerages moved in unison. Reporting identified contrasting views from other major research shops that continued to expect the Fed to hold policy steady into next year. Those disagreements underscore how closely investors are parsing labor market datapoints and Fed commentary for evidence of either persistent inflationary pressure or emerging slack.

Policy implications run beyond the timing of cuts. If easing follows primarily from leadership changes and communication shifts rather than a clear and sustained downturn in activity, markets may treat cuts as more conditional, maintaining sensitivity to inflation prints and payroll data. That scenario complicates the Fed's task of managing expectations, because easing perceived as driven by internal dynamics rather than by clear economic improvement could weaken the central bank's signaling power.

Longer term, a pivot to easing would represent another phase in the post pandemic monetary policy cycle, moving from aggressive tightening to gradual normalization and then to rate reduction as growth moderates. For households and businesses, lower policy rates would tend to ease financing costs and support debt servicing, but they would also raise the prospect of reigniting inflation if demand proves more resilient than anticipated.

Investors and policymakers will be watching the December meeting closely for language on the drivers and durability of any policy shift, and for guidance on the Fed's tolerance for inflation versus labor market objectives as the central bank navigates a complex economic backdrop.