Fed rate cuts are already over after they barely started as blowout jobs report shifts focus to hikes, BofA says

The Federal Reserve’s rate-cutting cycle is already complete since the latest jobs report showed a stronger economy and labor market than expected, according to Bank of America analysts.

That bearish outlook emerged in a note on Friday following the Labor Department’s report that employment increased by 256,000 in the most recent month, up from 212,000 in the previous month and exceeding predictions of 155,000. Additionally, the unemployment rate decreased to 4.1% from 4.2%, outpacing forecasts.

With a stable labor market in place, we believe the Fed’s cycle of cutting interest rates has come to an end,” BofA indicated. “As it stands, inflation remains higher than desired and has a greater likelihood of increasing further. The economy is currently performing well, and we see no compelling reason for the Fed to lower interest rates further.

Actually, not only is the rate-cutting phase complete, BofA noted that “the conversation should shift to hikes,” which could be on the table if the core personal consumption expenditure inflation reading surpasses a 3% annual rate and long-run inflation expectations begin to increase.

That marks a sharp reversal from September, when the Fed lowered interest rates for the first time since 2020, kicking off what was thought to be an ongoing easing cycle that was expected to continue through through 2025.

Instead, the central bank reduced interest rates by 100 basis points by making three cuts last year, and its predictions for further reductions this year have been repeatedly scaled back.

Wall Street is now factoring in just one potential interest rate cut this year, likely sometime in the third quarter, though the likelihood of it happening has decreased. This revised outlook allowed the 10-year Treasury yield to increase to 4.76% on Friday, its highest level since November 2023, which in turn sent stocks plummeting.

Apollo Chief Economist Torsten Sløk confirms that he still believes there is a 40% chance the Fed will increase interest rates this year, citing that the economy is gaining momentum.

He stressed that the economy is experiencing robust momentum, and the idea that monetary policy is too tight is actually not accurate.

Bank of America stated that the jobs data should support the idea that the Fed’s monetary policy is still not significantly limiting overall activity.

The data also indicate that wage growth is still ahead of price growth, which means consumers are likely to maintain their purchasing power, even if the economy starts to slow down, the note pointed out. Still, Bank of America believes that they must meet a high threshold before the Federal Reserve begins to raise interest rates.

Right now, Wall Street is taking into account the expected policies from the incoming administration of President-elect Donald Trump. Trump has promised broad-based tariffs, stricter immigration enforcement, and tax cuts – measures that many economists believe will lead to inflation.

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