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BofA Warns of Risk of Fed Mistake in Early Rate Cuts
Economy
Bank of America has warned that the Federal Reserve risks making a policy mistake if it begins cutting rates next month.
Bank of America warned that the Federal Reserve risks making a policy mistake if it starts cutting rates next month, despite Chairman Jerome Powell’s dovish tone in Jackson Hole.
“Barring further deterioration in the labor market, we believe the Fed risks making a policy mistake if it cuts rates,” the bank wrote.
“We see signs that economic activity has rebounded from a weak first half. If that’s true, the labor market is likely to recover as well. Meanwhile, the underlying inflation picture — excluding tariffs — has not improved since the Fed began cutting last year.”
BofA noted that while housing-related inflation has declined, other categories have remained flat or increased.
Powell, speaking in Wyoming, said “the balance of risks appears to be shifting” toward the labor market, citing concerns about job data revisions and the possibility of higher unemployment.
“The baseline forecast and changing balance of risks may require an adjustment in our policy stance,” he added.
BofA said the comments were softer than the bank and markets had expected, and that Powell was “clearly alarmed by the downward revision to the employment data.”
Markets responded by raising rates to the September cut, adding nearly 4 basis points of easing to futures. However, BofA is maintaining its rate-only forecast.
The bank said an unemployment rate of 4.2% with job growth of 70,000 or more could maintain the current stance, although a weaker result would tip the scales toward easing. Inflation data, including the August CPI and PPI, will also be critical.
BofA contrasted Powell’s tone this year with 2024, when he said “it’s time for a policy adjustment” and signaled the start of a rate-cutting cycle.
Now, with interest rates already 100 basis points lower and inflation higher, the bank argues that the Fed's risks are tilted higher, making premature easing more dangerous.
Barclays said yesterday it had revised its forecast back, pushing back one of its planned 2026 cuts to September, but said the threshold for sequential or larger steps remains high.