The Federal Reserve is widely expected to lower interest rates by 25 basis points to a range of 3.5%–3.75% at next week’s meeting. However, Bank of America warns that Chair Jerome Powell is facing one of the most divided Federal Open Market Committee (FOMC) groups in years.
According to a Thursday note from BofA strategists led by Mark Cabana, Powell will likely attempt to deliver a “hawkish cut” as a compromise between competing viewpoints on the committee. They added that while markets currently trust Powell’s ability to manage this balance, they remain skeptical he can fully achieve it.
Market pricing still reflects expectations for only limited easing after December. Investors are forecasting roughly 8 basis points of additional cuts in January and around 25 basis points across the first three meetings of 2025.
Bank of America anticipates two key revisions in next week’s FOMC statement. Policymakers are expected to acknowledge the recent rise in unemployment by removing the phrase that the jobless rate “remained low,” and they may also signal that the bar for additional rate cuts has moved higher.
The bank expects three dissenting votes: two from hawkish members and one from a policymaker who preferred a larger 50-basis-point cut. Further dissents from Michelle Bowman and Christopher Waller are possible depending on upcoming balance sheet decisions.
Updated economic projections are likely to point to stronger growth in 2025–2026, a slightly higher unemployment rate, and marginally lower inflation. BofA notes that these adjustments could give the Fed “cover” to cut rates while still appearing confident about the economic outlook.
The dot plot is expected to show two rate cuts next year and a long-run policy range of 3.0%–3.25%.
BofA believes Powell’s press conference will focus on the criteria for a possible pause in January, whether policy remains restrictive, and how he addresses hawkish criticism within the committee. Strategists cautioned that investors may not fully trust his forward guidance given that two previous hawkish messages were followed by rate cuts.
A heavy schedule of economic data releases after the meeting could also make it difficult for Powell to deliver a firm directional signal.
Markets will be watching for balance sheet announcements as well. BofA expects the Fed to reveal term repo operations and begin reserve management purchases in January—steps the bank believes the market is underestimating.
While the rate cut itself may spark only a small reaction, BofA expects balance sheet decisions to drive more meaningful market moves.
On the currency side, the bank forecasts “little to slightly positive” impact on the U.S. dollar. They argue that enough hawkish elements will accompany the cut to prevent a sharp USD selloff, with Powell likely to stress flexibility ahead of key economic data arriving the following week.
