The Federal Reserve is expected to reduce interest rates by 25 basis points to a range of 3.5%-3.75% at next week's meeting, but Bank of America says Chair Jerome Powell faces the most divided committee in years.

"We expect him to try to deliver a hawkish cut as a compromise," BofA strategists led by Mark Cabana said in a Thursday note. "We're skeptical about whether he will be able to pull this off. But for now, markets are giving him the benefit of the doubt," they added.

Markets are still pricing only modest easing beyond December, expecting just 8 basis points of potential cuts in January and only around 25 basis points in the first three meetings of next year.

BofA expects two significant changes in the Federal Open Market Committee (FOMC) statement. Notably, the policymakers are likely to acknowledge the recent rise in unemployment by dropping the claim that the jobless rate "remained low," while also signaling that the threshold for future cuts has risen.

The bank expects three dissents and sees Powell attempting to strike a firm tone even as the Fed eases policy. Specifically, it looks for two hawkish dissents and one from a policymaker who wanted a larger 50 bp move.

Additional opposition from Michelle Bowman and Christopher Waller is possible if the central bank proceeds with planned balance sheet actions.

Fresh economic projections are likely to show stronger growth in 2025–26, a slightly higher unemployment rate and marginally lower inflation forecasts. This adjustment provides "some cover for cutting rates despite the expected upgrades to the growth outlook."

The dot plot is expected to show two cuts next year and a policy plateau at 3.0%-3.25% afterward.

BofA believes Powell's press conference is likely to focus on the criteria for a possible January pause, whether rates remain restrictive, and how he characterizes hawkish objections.

Strategists note investors may be reluctant to take his guidance at face value after two prior hawkish messages were followed by cuts. A heavy data calendar in the weeks after the meeting further complicates any effort to signal a firm stance.

Markets will also watch for balance sheet measures. BofA expects the Fed to announce term repo operations and the start of reserve management purchases in January, describing these steps as underappreciated by investors.

The strategists see "a limited rates market reaction" to the cut itself, but a bigger move in response to balance sheet decisions.

On currencies, BofA anticipates "little-to-a slightly positive USD reaction," arguing that enough hawkish elements are likely to accompany the cut to prevent a meaningful selloff. Powell is still expected to emphasize flexibility ahead of key economic releases due the following week.

Source: Investing.com