Bank of America sounded the alarm: inflation is still rising, but the Federal Reserve wants to cut interest rates! The US dollar is afraid of a rare shock in 20 years

The Zhitong Finance App learned that the Bank of America warned that the US dollar will face an unfavorable situation: the Federal Reserve will lower interest rates in the face of rising annual inflation. The last time this unfavorable situation occurred was almost 20 years ago. Bank of America foreign exchange strategist Howard Du said in a report on Thursday: “If the Federal Reserve restarts the cycle of interest rate cuts, then any interest rate cuts for the rest of 2025 may occur against the backdrop of a year-on-year rise in inflation. This is likely to happen, but it is rare in history.”

Bank of America warns that the US dollar may repeat the mistakes of 2007

Du said that the last time real policy interest rates were lowered in the US was between the second half of 2007 and the first half of 2008, and the Bloomberg dollar index fell by about 8% during this period. His historical analysis found that the depreciation of the US dollar began before the Federal Reserve cut interest rates (as was the case this year), and continued even after interest rates were cut.

From the second half of 2007 to 2008, supply shocks drove up global food and energy prices. Despite this, the Federal Reserve lowered borrowing costs as the US real estate and job markets began to show signs of weakness.

Today, the Federal Reserve must simultaneously deal with economic uncertainty caused by US President Donald Trump's tariff policy and the weakness in the labor market. Traders expect the possibility that the Fed will cut interest rates by 25 basis points in September is close to 85%, although the July inflation rate rose at the fastest rate since January, and producer price increases also exceeded expectations.

Bank of America estimates that by the end of this year, even if the overall consumer price index (CPI) monthly increase remains around 0.1%, the year-on-year increase will reach about 2.9%, higher than the level of mid-2025.

Du and his colleagues are bullish on EURUSD recently. The goal is that the EUR/USD exchange rate will rise by about 3% to 1.20 by the end of this year.

The Bloomberg US Dollar Spot Index has fallen by about 1.3% since August, and has fallen by about 8% since 2025. This is the index's worst start since 2017. Two-year US Treasury yields, which are considered the most sensitive to the Federal Reserve's policies, have fallen by about 50 basis points so far this year.