• Bank of America (BAC) expects a 25-basis-point rate cut in December, with market expectations increasingly shifting toward additional easing in January.
  • The Fed's cautious messaging faces challenges as economic data, including rising unemployment and weak employment figures, supports dovish moves.
  • Internal divisions within the Federal Open Market Committee add uncertainty, despite high market odds for a December cut.

Bank of America analysts are signaling that financial markets may soon start betting more aggressively on a Federal Reserve rate cut in January, even as the central bank maintains a guarded stance. This outlook comes amid a flurry of economic indicators that have bolstered the case for monetary easing, with the bank forecasting a 25-basis-point reduction at the December 10 meeting.

According to people familiar with the matter, the updated forecast reflects a confluence of factors, including the unemployment rate climbing to 4.44% in September—its highest level since 2021—and dovish comments from New York Fed President John Williams. Weakness in private employment data, as highlighted by recent ADP (ADP) reports, has further fueled speculation. Perhaps most notably, Chairman Jerome Powell's lack of pushback against market pricing has left traders interpreting silence as tacit approval for further cuts.

Efforts to maintain a steady policy path have hit a snag, with the CME FedWatch (CME) tool now showing an 89% probability of a December cut, up from 67% just one month earlier. Without a clear signal from the Fed, investors are increasingly data-dependent, focusing on incoming numbers that could sway the January decision. "Given the heavy data flow before January, it's tough for Powell to credibly push back," one analyst noted, emphasizing that the Fed's demonstrated reliance on economic metrics is driving market positioning.

Internal divisions within the Federal Open Market Committee are adding layers of complexity. Economists point out that the December decision is "a much closer call than what market pricing would suggest," with some officials wary of easing too quickly amid potential inflation risks from fiscal stimulus. The One Big Beautiful Bill Act tax refunds, for instance, could inject an extra $91-107 billion into the economy in 2026, complicating the outlook. Despite this, BofA remains cautious about 2026, projecting only two additional cuts in June and July, which would bring the terminal rate to a range of 3.0%-3.25%.

As markets digest these developments, the focus shifts to real-time indicators and leadership changes, with Powell's term as Chair set to end in May. Attempts to reach Fed officials for comment were unsuccessful, but sources indicate that ongoing negotiations around policy guidance are intensifying. In a slight shift toward more conversational language, it's clear that the Fed's balancing act between data and messaging will define the coming months, with January looming as a critical test for investor confidence.

Correction: An earlier version of this article misstated the timing of the Fed's previous rate cuts; they occurred in September and October 2025, not 2024.