Fed Likely to Cut Rates, But Not in a Hurry: BofA

Bank of America analysts expect that the Federal Reserve will approach interest rate cuts with caution, despite recent economic data suggesting a gradual easing may be warranted.

The bank predicts a 25 basis point cut in September, followed by another in December, but advises against anticipating a swift series of reductions.

According to Bank of America’s analysis, strong retail sales and stable inflation figures will likely deter the Fed from implementing multiple cuts in quick succession. July retail sales exceeded expectations, showing a 1.0% overall increase and a 0.4% rise in the ex-autos component. This resilience in consumer spending, even as inflation cools, reflects what BofA describes as “a slowing but not weak economy.”

On the inflation front, July’s Consumer Price Index (CPI) data met forecasts, with both headline and core CPI inflation registering at 0.2% month-on-month. BofA notes that “a broad-based slowdown in inflation” supports a measured rate cut in September.

While the overall outlook remains positive, analysts caution about potential risks. They point out that although layoffs are low, the recent rise in unemployment is primarily due to an increase in the labor force rather than substantial job losses.

The analysts suggest that “this time could be different,” but they acknowledge that risks lean towards the downside, particularly in light of historical trends.

In summary, Bank of America anticipates that the Fed will take a “slow and steady” approach to rate cuts, carefully balancing the need to support the economy with concerns about making hasty decisions.