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Federal Reserve Chairman Jerome Powell

President Donald Trump's intensifying trade war with China has changed everything - at least in the eyes of economists at Bank of America, the second-biggest U.S. lender.

As recently as July, the bank's economists were predicting that the Federal Reserve wouldn't need to cut U.S. interest rates to bolster economic growth.  

But after an escalation of the trade war in August, they now predict that the U.S. central bank will reduce the official interest rate three more times this year. Such an effort would be aggressive even in the eyes of investors, with trading in Chicago futures markets currently reflecting just 46% odds of three cuts by December.  

Fed officials led by Chairman Jerome Powell have argued that while the central bank is independent of politics it has to respond to the confidence-damaging effects of policies like Trump's trade war, which has cast a pall over the global economy while instilling such anxiety in U.S. business executives that many of them have delayed or canceled spending on new factories, equipment and technology.  

"The unpredictable nature of the trade war will keep businesses at best in wait-and-see mode or, at worst, start looking for ways to cut costs via less investment or smaller workforce," the economists wrote in a note to clients. "Weaker growth will inevitably transmit to financial markets and translate into weaker sentiment, as we have started to see over the past month."

The trade war escalated in August with tit-for-tat actions from both sides, and while Trump administration officials say they're now holding discussions with the Chinese to resolve the dispute, the Bank of America economists don't see a breakthrough anytime soon.    

They now predict that U.S. growth will slow to an annual pace of 1.3% in the fourth quarter, from 3.1% in the first quarter and 2% in the second quarter. For the full year, U.S. gross domestic product will rise by 2.3%, down from 2.9% in 2018. Next year, growth will slow further, to 1.5%.

And even those less-than-rosy economic forecasts assume the benefit of aggressive rate-cutting by the Fed.   

"We have been whittling away at our growth forecasts as the trade war has escalated," the economists wrote. "Not only will trade be significantly disrupted, but we expect an even bigger dent to confidence and deterioration in financial conditions."

Higher tariffs on Chinese imports will push U.S. consumer prices up by about 2.3% next year, instead of the 2.1% pace the economists were previously projecting. In 2019, prices for consumer expenditures will likely rise 1.8%. 

Elevated prices could lead to reduced spending -- crucial since consumer expenditures account for about 70% of GDP.  

And despite the expectation that consumer-price increases will exceed the Fed's target of 2% next year, officials at the central bank are likely to cut interest rates at meetings later this month as well as in October and December, the Bank of America economists wrote: "They will not be able to sit and watch the economy fall below trend."