Why the Fed won't cut rates until December, according to Bank of America

"We think the Fed can be patient," Bank of America economists wrote in new research.

• The Federal Reserve will wait until December to cut interest rates, Bank of America economists say.
• The forecast runs counter to consensus, with 90% of investors expecting a first cut in September.
• "We think the Fed can be patient," BofA wrote in new research.

In a Thursday research note, Bank of America reiterated its prediction for rate cuts to begin in December, even with a majority of investors expecting one in September.

The firm's economists say that while some officials have appeared dovish in recent remarks, the Fed will likely wait until more data shows slowing inflation or a cooling economy.

Meanwhile, 90% of investors expect a cut in September, according to the CME FedWatch tool. That number has been on the rise, increasing 2 percentage points in the last day amid encouraging inflation data.

BofA says that Fed Chair Jerome Powell's decision rests on a dual mandate: "Cuts can happen because the economy cools, because inflation slows, or both."

With inflation closer to the Fed's respective targets, the Fed can now give more balanced attention to both inflation and employment. It continues to seek a 2.0% level.

The economists note, too, that with so much consensus around rate cuts happening in September, markets are already pricing it in. They say that gives the Fed less reason to cut rates as the market adjusts favorably.

"Instead, the question is whether the Fed actively pushes back on market pricing for September as it did in January when Chair Powell said a March rate cut 'was not the baseline,'" they said.

BofA expects mild pushback, in which Powell reiterates that the committee needs more data and that decisions will be made on a meeting-to-meeting basis.

And since the committee's July meeting is set to occur before July payrolls and CPI data arrive in August, the Fed would have to actively push back on the market for a September cut.

"We doubt the likelihood of this happening. Why not wait and let the data speak? Market pricing would adjust as needed," the analysts said.

Still, they didn't rule out a September cut, and said they may revise their December prediction in the case of "a dovish Fed, soft July employment, or a repeat of June inflation."

High unemployment numbers for July and uneven inflation would further confirm a December cut, BofA said.