(Bloomberg) -- The angst on Wall Street over how much the Federal Reserve will cut interest rates this year was laid bare in Bank of America Corp.’s latest results.
Management indicated — as part of its forecast for net interest income — it expects the Fed to lower rates by a quarter point at policy meetings in September, November and December.
Bank of America’s chief economist, Michael Gapen, on the other hand, is forecasting a single 25-basis-point cut in December. After U.S. June inflation data released last week came in cooler than anticipated, however, he said “risks are tilting toward an earlier start date.”
Financial forecasts often embed assumptions about what the Fed will do, and it’s common to rely on what’s priced into derivative contracts. During July, those market-implied odds have shifted in favor of two Fed rate cuts this year starting in September — and a roughly 50 per cent chance of a third one by year-end.
The results on Tuesday cast a spotlight on the variation that exists within even a single firm. Bank economists and researchers are in a different line of work, advising customers on how to potentially profit if the market turns out to be wrong.
The Bank of America split stands out because Gapen’s forecast is among the least optimistic by an economist at a major U.S. bank. Forecasts for a single quarter-point cut this year, coming as late as December, were more common until recently. Gapen wasn’t immediately available to comment.
Since April that forecast has been abandoned by Barclays, BNP Paribas, Deutsche Bank and JPMorgan, with economists at all those banks adopting views more closely aligned with the market’s.
Bank of America’s management outlook “assumes that the current forward curve will materialize,” Alastair Borthwick, chief financial officer, said during the earnings conference call.
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