Bank of America analysts anticipate that the Federal Reserve will proceed cautiously with interest rate cuts, despite recent economic data supporting a gradual easing.
The bank expects a 25 basis point cut in September, followed by another in December, but cautions against expecting an aggressive series of reductions.
Bank of America's analysis suggests that solid retail sales and stable inflation will prevent the Fed from rushing into multiple cuts.
July retail sales outperformed expectations, with a 1.0% increase overall and a 0.4% rise in the ex-autos component. This indicates that consumer spending remains resilient, even in a cooling inflation environment, which BofA believes is consistent with "a slowing but not weak economy."
On the inflation front, July's Consumer Price Index (CPI) data also aligned with expectations, with both headline and core CPI inflation at 0.2% month-on-month.
According to BofA, "a broad-based slowdown in inflation" supports the case for a measured rate cut in September.
While the outlook is generally positive, the analysts warn of potential risks. They note that while layoffs remain low, the recent uptick in unemployment is largely due to an increase in the labor force rather than widespread job losses.
"This time could be different," the note says, but it acknowledges that risks are tilted to the downside, particularly given historical trends.
Overall, Bank of America expects the Fed to adopt a "slow and steady" approach to rate cuts, balancing the need to support the economy with concerns about moving too quickly.