Bank of America reiterated its prediction for rate cuts to begin in December, going against the expectation of a majority of investors who anticipate a cut in September. The firm's economists believe that the Federal Reserve will likely wait for more data showing slowing inflation or a cooling economy before implementing any cuts.
According to the CME FedWatch tool, 90% of investors are expecting a rate cut in September, with this number steadily increasing in recent days due to positive inflation data. BofA highlights that Fed Chair Jerome Powell's decision will be based on a dual mandate, where cuts could occur if the economy cools, inflation slows, or both.
With inflation nearing the Fed's target of 2.0%, the central bank can now pay equal attention to inflation and employment. The economists also note that since markets are already pricing in a rate cut for September, the Fed may be less inclined to make the cut as the market adjusts accordingly.
BofA expects Powell to push back against market expectations for a September cut, emphasizing the need for more data-driven decisions on a meeting-to-meeting basis. The analysts suggest that the Fed may not take action until more data, such as July payrolls and CPI numbers in August, are available.
While BofA does not rule out a September cut, they anticipate a December cut if July employment numbers remain weak and inflation is inconsistent. Ultimately, the decision on rate cuts will depend on how the data unfolds in the coming months and how the Federal Reserve chooses to respond to market expectations.