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Investing.com - BofA Securities has reiterated its prediction the Federal Reserve will not slash interest rates in 2025, even as bets for a cut as soon as the central bank’s September meeting have grown following soft labor market data last week.
Last week, figures came from the Bureau of Labor Statistics showed that the U.S. added fewer jobs than anticipated in July.
However, much of the reaction to Friday’s report swirled around its heavy downward revisions to numbers from June and May, which indicated that the economy’s resilience since President Donald Trump’s announcement of elevated "reciprocal" tariffs on April 2 was not as strong as it had seemed.
Following the jobs report, markets are now widely pricing in a rate reduction at the conclusion of the Fed’s September 16-17 gathering. According to CME’s FedWatch Tool, the chances of a quarter-point cut at the meeting now stand at nearly 80%.
In a note, analysts at BofA led by Aditya Bhave said that the deep revisions to the payrolls "challenge" their view that the Fed will likely leave interest rates unchanged this year at 4.25% to 4.5%.
"This increases the probability of what we view as the most likely alternate scenario: ’bad cuts,’ due to deterioration in the labor market. But we are sticking with our Fed call for now," the brokerage wrote.
They argued that markets are conflating "recession with stagflation," referring to a time of high inflation and tepid economic activity.
Meanwhile, immigration restrictions have heavily dented the supply of available workers in the United States, with the size of the foreign born workforce down by 802,000 since April. As a result, despite a weakening in worker demand, slack in the labor market has not risen, the BofA analysts said.
Notably, against this backdrop, the unemployment rate and the ratio of vacacies to unemployed workers has stayed flat ofr a year, while wage and aggregate labor income growth has been robust, they flagged, adding that Fed Chair Jerome Powell has suggested that "he would look through weak job growth as long" as long as the jobless rate is "range bound."
They also said the Fed is facing a problem with inflation hovering stubbornly above its 2% target, a trend that has been a key driver behind the central bank’s decision to adopt a "wait-and-see" attitude to future policy actions.
"The Fed is still missing by a lot more on inflation than its labor mandate. If it were to cut in September, it would be putting a lot of faith in a forecast of labor market deterioration, with no evidence that inflation has peaked," the BofA analysts wrote.