Key Takeaways
May 8, 2026 · 2 min read · By Rishabh Bhardwaj
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Bank of America's economics team now thinks the Federal Reserve will hold interest rates at their current level through all of 2025 and 2026, with the first cut not arriving until 2027. The call is more aggressive than most Wall Street forecasts and reflects growing concern that inflation will stay elevated far longer than the Fed, or markets, have priced in.
Bank of America points to two forces. First, a more hawkish tilt at the Fed, meaning policymakers are leaning toward keeping rates high rather than cutting them. Second, inflation that isn't falling fast enough. If price pressures stay stubborn, the Fed has no political or economic cover to ease borrowing costs, regardless of how much slower growth gets.
The Fed's benchmark rate directly sets the floor for borrowing costs across the economy, mortgages, auto loans, corporate debt, and credit cards all follow it. Every month rates stay at current levels, that pressure compounds for households and businesses carrying variable-rate debt or looking to refinance.
For markets, a 2027 rate-cut timeline pushes back a key catalyst that equity and bond investors have been anticipating. Stocks, especially in rate-sensitive sectors like real estate and utilities, tend to benefit when cuts arrive. Longer-dated bonds also rally when rates fall. Both trades get delayed if Bank of America is right.
For businesses, sustained high rates keep the cost of capital elevated. Companies planning expansions, acquisitions, or refinancing will face tighter conditions longer than many had planned for. Smaller firms that rely on floating-rate credit lines feel this most acutely.
For consumers, mortgage rates are unlikely to come down meaningfully in the near term. Homebuyers waiting for relief may be waiting years, not months. Credit card and personal loan rates, which closely track Fed policy, also stay high.
The Bank of America view is more pessimistic than the Fed's own projections, which as of early 2025 still pointed to cuts before 2027. Whether the broader market re-prices to match this timeline depends on upcoming inflation data and how Fed officials talk about the path ahead in coming months.
US inflation hit 4.1% in May 2026, its highest level in three years, driven by rising energy prices, keeping a Federal Reserve rate hike in September firmly on the table. Consumer spending rose on tax refunds and a stock market rally, while business investment in AI equipment also rebounded.
RBI data through May 2026 shows that its 85 basis point repo rate cuts since February 2025 are only partially reaching borrowers, with lending rate transmission described as moderated. Slower pass-through limits relief for loan holders and may pressure the RBI to cut rates further to achieve its growth goals.
U.S. consumer prices rose at a 4.2% annual rate in May, the fastest pace in three years, driven by a spike in energy costs. The reading puts pressure on the Federal Reserve to respond, with potential knock-on effects for interest rates, borrowing costs, and household purchasing power.
US inflation rose to a three-year high in May, driven by surging gas and energy prices tied to the Middle East conflict. The reading complicates the Federal Reserve's path toward cutting interest rates and keeps pressure on household budgets.