Bank of America's rates strategy team published a research note Tuesday projecting the Federal Reserve will delay interest rate cuts until the second half of 2027 — a timeline far more hawkish than the market consensus of a late-2026 or early-2027 move. The call sent the 10-year Treasury yield to 4.46%, its highest close since January, and triggered a broad sell-off in rate-sensitive equities.
The Case for Extended Hold
BofA's projection rests on three pillars: inflation stuck above 3% through 2026 driven by the oil shock, resilient labor markets averaging 180,000 monthly payroll gains that prevent a "dovish pivot" narrative, and fiscal policy that remains expansionary despite the deficit. The strategists argue that the Fed's September 2024 pivot to cutting has been completely unwound by the Iran conflict's inflationary impact.
Rate Market Repricing
Fed funds futures have already moved aggressively in BofA's direction. Traders have removed any probability of a rate cut essentially through April 2027, according to CME FedWatch. The December 2027 fed funds future implies a rate of 3.25% — only 37.5 basis points of cuts over 20 months, the most hawkish forward curve since the tightening cycle ended.
Impact on Housing and REITs
The higher-for-longer rate outlook is crushing rate-sensitive sectors. The 30-year mortgage rate has climbed back above 6.8%, threatening the nascent housing recovery. REITs (XLRE) fell 1.8% on Monday and are down 12% year-to-date. Utilities (XLU) dropped 1.5%. Regional bank stocks (KRE) declined 1.2% on net interest margin compression concerns as the yield curve flattens.
Counterarguments
Not all strategists agree. Goldman Sachs maintains its call for a December 2026 cut, arguing that if the Iran conflict resolves and oil falls back below $80, inflation could drop rapidly. Morgan Stanley sees a September 2026 cut as the base case if core CPI stays below 3%. The wide dispersion in rate-cut forecasts reflects genuine uncertainty about how the oil shock will evolve.