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Bank of America cautioned Friday that the Federal Reserve risks making a policy mistake if it begins cutting rates as early as September. The warning comes after Fed Chair Jerome Powell struck a dovish tone at the Jackson Hole symposium, raising expectations of an imminent move.
“Barring further deterioration of the labor market, we think that the Fed would risk a policy error if it were to cut rates,” BofA wrote in a note. The bank pointed to signs that U.S. economic activity has strengthened after a soft first half of the year, which could also revive labor market momentum. At the same time, underlying inflation pressures, apart from housing, have either stayed flat or edged higher.
Powell, however, highlighted growing risks around jobs, citing payroll revisions and the chance of rising unemployment. “The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he said. BofA described those remarks as “more dovish than expected” and suggested Powell was spooked by the labor data revisions.
Markets quickly priced in more easing, with futures reflecting nearly four additional basis points of expected cuts in September. But BofA still expects the Fed to hold steady, saying unemployment around 4.2% alongside job growth of 70,000 or more would argue against easing. The bank added that upcoming inflation readings, including August CPI and PPI, will be critical for the Fed’s decision.
BofA contrasted Powell’s softer tone with last year, when he openly declared that “the time has come for policy to adjust,” signaling the start of rate cuts. With policy rates already a full percentage point lower and inflation running higher, the bank argued that premature easing now poses greater risks.
Elsewhere, Barclays revised its outlook, moving one of its projected 2026 cuts forward to September but warning that the bar for consecutive or larger moves remains high.