Bank of America Global Research revised its interest rate forecast in May 2026, predicting the Federal Reserve will not lower rates until the second half of 2027. The bank had previously projected two rate cuts in 2026, in September and October.

"We no longer expect the Fed to cut rates this year," economists with Bank of America Global Research said in a note to clients. The economists noted that multiple shocks affecting the economy, including the Iran war, tariffs and the emergence of artificial intelligence, are making it harder to forecast interest rate moves.

The earlier forecast was based in part on an expectation that Kevin Warsh, President Trump's nominee to succeed Jerome Powell as Federal Reserve chair, would steer policymakers toward easing monetary policy. Warsh has signaled openness to easing borrowing costs, but several Federal Reserve officials remain reluctant to lower rates.

Federal Reserve Bank of Chicago President Austan Goolsbee and St. Louis Federal Reserve Bank President Alberto Musalem have recently pushed back against cutting rates, citing concerns that AI-driven productivity gains could boost spending and cause the economy to overheat.

Inflation stands at 3.3%, above the Federal Reserve's 2% annual target. Inflation has risen since the start of the Iran war as energy prices climbed. Interest rate cuts can stimulate economic growth but can also increase inflation.

"Core inflation is too high, and moving up," the Bank of America economists said in the note to clients. CME Group's FedWatch tool shows a less than 50% chance of rate cuts until the second half of 2027.

Deutsche Bank economists expect consumer prices to remain above the Federal Reserve's 2% annual target over the next year. In a May 8 note to investors, the Deutsche Bank economists said trend inflation has not shown clear signs of dipping below 3% due to ongoing inflationary pressures, including the impact of tariffs and AI pushing up computer hardware and software costs.

The Federal Open Market Committee, composed of 12 members, decides on interest rate moves. The Federal Reserve last cut rates in December 2025, lowering the federal funds rate by 0.25 percentage point. Since then, the federal funds rate has remained in the range of 3.5% to 3.75%.

A jobs report released Friday showed employers added 115,000 jobs in April, topping forecasts of 65,000 payroll gains. The strong jobs data comes as policymakers weigh whether economic conditions support a return to rate cuts before the second half of 2027.