Bank of America sounds the alarm: Inflation is still rising, but the Federal Reserve is set to cut interest rates! The dollar may face a rare 20-year impact
Bank of America warns that the dollar faces unfavorable conditions, as the Federal Reserve may cut interest rates amid rising inflation. This situation is rare in the past 20 years and could repeat the events of 2007. Analyst Howard Du points out that if the Federal Reserve resumes interest rate cuts, the depreciation of the dollar may continue. Traders expect an approximately 85% chance of a 25 basis point rate cut by the Federal Reserve in September. At the same time, the euro to dollar exchange rate is expected to rise to 1.20. The Bloomberg Dollar Index fell about 1.3% in August
According to the Zhitong Finance APP, Bank of America warns that the US dollar will face an unfavorable situation: the Federal Reserve may lower interest rates amid rising annual inflation rates. The last time such an unfavorable situation occurred was nearly twenty years ago. Bank of America foreign exchange strategist Howard Du stated in a report on Thursday: "If the Federal Reserve restarts the rate-cutting cycle, any rate cuts for the remainder of 2025 may occur against the backdrop of rising year-on-year inflation. This situation is possible, but historically rare."
Bank of America warns that the US dollar may repeat the mistakes of 2007.
Du noted that the last time the US experienced a situation where actual policy rates were suppressed was from the second half of 2007 to the first half of 2008, during which the Bloomberg Dollar Index fell by about 8%. His historical analysis found that the depreciation of the dollar began before the Federal Reserve cut rates (similar to this year's situation) and continued even after the rate cuts.
From the second half of 2007 to 2008, supply shocks drove up global food and energy prices. Nevertheless, the Federal Reserve lowered borrowing costs as signs of weakness began to appear in the US housing and labor markets.
Today, the Federal Reserve must simultaneously address the economic uncertainty caused by President Donald Trump's tariff policies and the weakness in the labor market. Traders expect an approximately 85% chance that the Federal Reserve will cut rates by 25 basis points in September, despite inflation rising at its fastest pace since January and producer prices exceeding expectations in July.
Bank of America estimates that by the end of this year, even if the monthly increase in the overall Consumer Price Index (CPI) remains around 0.1%, the year-on-year increase will reach about 2.9%, higher than the mid-2025 level.
Du and his colleagues are currently bullish on the euro against the dollar, targeting an increase of about 3% in the euro-to-dollar exchange rate to 1.20 by the end of this year.
The Bloomberg Dollar Spot Index has fallen about 1.3% so far in August and about 8% year-to-date. This is the worst start for the index since 2017. The two-year US Treasury yield, considered the most sensitive to Federal Reserve policy, has fallen by about 50 basis points so far this year
