Interest Rate Predictions: Bank of America Sees Two Fed Cuts in 2026

Bank of America Global Research is signaling a significant shift in the Federal Reserve's interest rate policy down the road. They're forecasting two interest rate cuts in 2026, specifically in June and July. For us regular folks trying to make sense of it all, this means the cost of borrowing money could start to ease up a couple of years from now, as the Fed looks to keep the economy humming along.

Now, why would the Fed, which has been so focused on taming inflation by raising rates, suddenly start cutting them? It's a complex picture, and as someone who’s spent a good chunk of time watching these economic cycles, I can tell you it’s all about balance. Bank of America's economists point to a few key reasons for this future forecast: a cooling labor market, potential changes in the Fed's leadership, and the delayed impact of the rate hikes we've already seen.

Interest Rate Predictions: Bank of America Sees Two Fed Cuts in 2026

What's Driving This Forecast? Let's Break It Down.

When I look at economic forecasts, I'm always searching for the “why.” It's not enough to just know what might happen; understanding the underlying currents is what gives us real insight.

The Sputtering Engine: A Weakening Labor Market

One of the biggest clues Bank of America is using is the expectation of a cooling labor market. Think about it: when jobs are plentiful and wages are climbing rapidly, it can push prices up because businesses have to pay more and, well, we have more money to spend. But if the job market starts to slow down, with fewer job openings and perhaps more people looking for work, that puts less pressure on wages and, by extension, on inflation.

• Rising Unemployment: Even a small tick up in unemployment can signal that the economy is losing steam, and the Fed tends to react to this.
• Slowing Wage Growth: When paychecks aren't growing as fast, people tend to spend less, which can help cool down demand and inflation.

This isn't about the economy crashing, mind you. It's more about the economy finding a more sustainable pace after a period of high demand. The Fed's job is to keep things from overheating or from falling into a deep slump.

A New Captain at the Helm? The Influence of Fed Leadership

This is a fascinating point raised by Bank of America. The term for the current Fed Chair, Jerome Powell, expires in May 2026. This means there's a real possibility of a new appointment.

Why does this matter so much? The Federal Reserve Chair is a massively influential figure. They don't just have a vote; they set the tone, guide the discussion, and often have a significant hand in shaping the consensus among the Federal Open Market Committee (FOMC) members.

• Dovish vs. Hawkish: Generally, a “dovish” Fed leans towards lower interest rates to support employment and growth, while a “hawkish” Fed prioritizes fighting inflation by keeping rates higher. A new Chair, appointed by a different administration, might bring a different philosophy.
• Shifting the Committee: It's not just the Chair. Over time, a new administration can appoint other members to the Fed's Board of Governors. This can gradually shift the overall leanings of the entire committee.

While economic data is always the primary driver, a highly anticipated change in leadership can certainly influence market expectations and the Fed's forward guidance.

The Balancing Act: Growth, Inflation, and Time

Bank of America isn't predicting a recession here. In fact, they're actually more optimistic than many others about the US economy in 2026, expecting 2.4% GDP growth. This is a significant point because it suggests they believe the Fed can cut rates without letting inflation get out of control.

How can they cut rates and still get growth?

• Lagged Effects of Previous Cuts: Monetary policy is like a slow-moving ship. The rate hikes we've seen take time to really work their way through the economy. By the time 2026 rolls around, the full impact of those higher rates might be felt, allowing for some easing.
• Business Investment & Fiscal Stimulus: Bank of America also points to increased business investment – companies spending more on equipment, technology, and expansion – and potential fiscal stimulus (government spending) as drivers of growth. This can provide a boost to the economy even if interest rates aren't super low.

However, it's not all smooth sailing. They also warn of risks like sticky inflation (inflation that's hard to bring down) and the possibility of AI-driven bubbles in certain markets, which could create unexpected volatility.

Where Do Rates End Up?

Bank of America's forecast, building on a projected cut in December 2025, suggests these two cuts in 2026 would bring the federal funds rate target range down to between 3.00% and 3.25%.

To give you some context, the federal funds rate is the target rate that banks charge each other for overnight loans. It influences a wide range of interest rates in the economy, from mortgages and car loans to credit cards and business loans. So, a shift down in this range would generally mean borrowing costs become more affordable.

Beyond the Rate Cuts: A Broader Economic Picture

It's always helpful to see the bigger picture. Bank of America’s outlook for 2026 extends beyond just interest rates:

• GDP Growth: As I mentioned, they're relatively bullish with a 2.4% GDP growth expectation for the end of 2026.
• Inflation Forecast: They see headline and core PCE inflation around 2.6% and 2.8% respectively by year-end 2026. Core CPI is expected to be about 2.8%. They acknowledge that tariffs could keep inflation a bit stubborn in the short term.
• Labor Market: Job growth is projected to average 50,000 per month, with the unemployment rate settling slightly lower at 4.3% by late 2026.
• Housing Market: Expect a pretty flat housing market in terms of price appreciation, but with more homes coming onto the market.
• Stock Market and Commodities: Interestingly, they have a strong outlook for the S&P 500, targeting 7100 by year-end 2026, driven by earnings growth. They also forecast significant price increases for commodities like copper and gold.

What This Means for You and Me

While these forecasts are for 2026, they offer a valuable glimpse into the long-term thinking of some of the smartest minds in finance.

• For Borrowers: If this forecast holds true, it suggests a time when taking out a mortgage, a car loan, or financing a business might become cheaper.
• For Savers: On the flip side, if interest rates come down significantly, the returns on savings accounts and certificates of deposit (CDs) might also decrease.
• For Investors: The optimistic outlook for stocks and commodities suggests potential opportunities, though this always comes with risks.

It’s crucial to remember that economic forecasting is an art, not an exact science. A lot can happen between now and 2026. However, understanding these projections from institutions like Bank of America helps us prepare for potential shifts in the economic environment.