An interest rate cut from the Federal Reserve at its next meeting later this month would be a misstep, according to Bank of America. “A September Fed cut is unwarranted with the data at hand,” Claudio Irigoyen, a global economist at the bank, wrote to clients in a note on Wednesday. Fed funds interest rate futures are pricing in a more than 91% likelihood that the central bank will lower short-term borrowing costs at its policy-setting meeting in two weeks, according to CME’s FedWatch tool. That’s up from around 80% a month ago. Irigoyen pointed to what he sees as a “dovish pivot” from Fed Chair Jerome Powell in his speech at a central bank symposium at Jackson Hole, Wyoming in late August. But there are several reasons to believe that a shift to looser monetary policy isn’t the correct move, the economist said. “Rushing to cut rates could translate into a policy mistake,” he said. Irigoyen highlighted a “supply-driven slowdown in the labor market,” meaning fewer entrants into the economy rather than a slowdown prompted by less demand for labor, paired with “a stable [unemployment] rate indicating limited slack.” At the same time, inflation remains “above target,” with Bank of America estimating core personal consumption “peaking at 3.3% this year and stuck above 3% in 1H26,” and consumer expectations of future inflation staying “volatile.” Finally, the economist cited “mounting” political pressure as another element that could lead to a policy error. President Donald Trump has publicly admonished the central bank — and Powell specifically — over what he sees as an unnecessary delay in lowering interest rates. The Fed last cut rates in December, 2024. Irigoyen acknowledged that carrying out the Fed’s dual mandate of promoting high employment and stable inflation is difficult in environments tinged with even mild “stagflation,” or periods of stubborn inflation and sluggish growth. But he said that the Fed cutting rates and driving inflation to peak near the end of the year looks to be more of a risk than waiting too long and seeing the labor market weaken from keeping rates where they are, presently 4.25% to 4.50%.
The Fed is headed toward a ‘policy mistake,’ says Bank of America
