Bank of America economists declared the Federal Reserve will not cut interest rates under Jerome Powell's leadership after January jobs data showed broad-based employment strength. The forecast marks a shift from earlier expectations of gradual easing in 2026.
"The broad-based strength in the Jan jobs report vindicates our view that the Fed won't cut under Powell," Bank of America analysts stated. The firm also warned that Kevin Warsh, a potential Fed successor, faces limited room for significant cuts unless unemployment rises.
"The key risk to his call for significant cuts is a decline in the u-rate. Therefore, the path to cuts under Warsh (which we don't think the economy needs) now looks narrower," the Bank of America team wrote.
Deutsche Bank maintains a contrasting outlook, forecasting the S&P 500 will hit 8,000 by December 2026. The German bank anticipates dollar weakness as rate cuts eventually materialize despite current labor strength.
Bank of America analysts questioned whether rising productivity data reflects genuine labor efficiency gains. Corporate profits continue climbing while labor income falls, creating what the firm describes as a K-shaped economy. "This split between profits and income is consistent and being reinforced by the rally in financial as well as real assets, which are more concentrated among higher- and middle-income households," analysts wrote.
The productivity debate carries implications for banking institutions navigating capital allocation and lending strategies. If productivity gains prove ephemeral, the profit-wage divergence could pressure consumer credit quality and deposit growth.
For global banks, the bifurcated outlook creates strategic challenges. Institutions must balance preparations for extended higher rates against positioning for eventual easing cycles. Treasury management, duration risk, and loan portfolio composition face competing pressures depending on which scenario unfolds.
The January employment report has effectively pushed rate cut expectations further into the future, forcing banks to recalibrate funding costs and asset-liability management assumptions. Unemployment trends will determine whether the current hawkish stance holds or gives way to the easing some forecasters still anticipate.