Here’s why BCA Research says "markets are wrong on U.S. interest rates"

Published 08/08/2025, 11:34
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Investing.com - Market forecasts for upcoming interest rate cuts are incompatible with ongoing one-year inflation expectations, according to analysts at BCA Research.

Investors are currently pricing in more than one percent of rate cuts at the Federal Reserve’s upcoming meetings over the next one-year period, driven in part by a recently weak employment report, the strategists led by Dhaval Joshi argued in a note.

This would bring borrowing costs below 3.3%, where markets expect inflation to stand in one year, according to Bloomberg and CME Group (NASDAQ:CME) data cited by BCA.

"These two market expectations are inconsistent with one another because if inflation does run at 3.3%, then the Fed will be unable to deliver that magnitude of rate cuts," the analysts wrote.

"And if the Fed can deliver that magnitude of rate cuts, then inflation is unlikely to be running at 3.3%."

The comments come as debate is swirling around the trajectory of U.S. interest rates. Some Fed policymakers, echoing strident demands from President Donald Trump, have called for immediate cuts, arguing that this would help bolster the labor market.

However, it remains unclear if July’s soft employment report was fueled by a fall in hiring demand or decline in available workers due to a crackdown on illegal immigration by the White House, the BCA analysts said. If it is the former, a rate cut could be effective to spur spending and investment, but a reduction may not aid solving a drop in the supply of workers, they added.

Meanwhile, inflation above the Fed’s 2% has been cited as a reason to leave rates steady -- and many Fed officials have flagged uncertainty around the impact of Trump’s aggressive tariff agenda on price gains. Recent economic figures have suggested that the levies are starting to feed into the costs of some goods, although headline inflation has stayed relatively muted.

Against this backdrop, the BCA analysts recommended "neutral allocation to bonds until there is a genuine worsening in cyclical U.S. unemployment," as well as taking a long U.S. dollar-to-Hungarian zloty position to "play a technical rebound" in the greenback.

"[F]or stocks, given their recent near straight-line rally, we are taking August off before reassessing our cyclical allocation at end month or in September," the BCA analysts said.

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