Quarterly Fed rate cuts 'makes the most sense': BofA's Gapen

With Wall Street expecting an interest rate cut from the Federal Reserve in September, could there be more to follow if the economy keeps pace?

BofA Securities head of US economics Michael Gapen joins Morning Brief to give insight into what potential rate cuts could look like moving forward.

"Initially, the view will be it's a quarterly cut cycle, so a gradual cut...But obviously the further you look out I mean we can write down these kind of stylized baseline forecasts that assume a lot of things work out well. And I still think that's right. The economy just rarely evolves in these straight line, smooth fashion. So the further you get out into 2025 and you're past the election and we know kind of what policies we're getting, maybe the view is different. But I think initially...cutting quarterly makes the most sense from the Fed."

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This post was written by Nicholas Jacobino

Video Transcript

Yeah, Michael, what do you think the pace of those rate cuts are likely to look like we talked so much about when the fed is going to start cutting.

But I think what matters more here to the street and I know you've written about this is is more so the pace of that and what that more realistically or accurately could look like, right, very quickly here, it's going to shift to pace and end point for the market.

I think at least initially the view will be it's a quarterly cut cycle.

So a gradual cut, it's a normalizing policy rate following and inflation down inflation is decelerating gradually.

So cuts are likely to be gradual.

But obviously, the further you look out, I mean, we can write down these, these kind of stylized baseline forecasts that assume a lot of things work out well.

And I still think that's right, the economy just though it rarely evolves in kind of these straight line smooth fashion.

So the further you get out into 2025 and you're past the election and we know kind of what policies we're getting, maybe the view is different.

But I think initially as we look into the rest of this year and perhaps the early part of next year, I think cutting quarterly makes the most sense from, from the FED.

Uh We've been talking about inflation, labor market, anything else on your radar in terms of data that we haven't really touched on that you think is important to the calculus at the FED.

Well, I think that part of the calculus in, in markets and at the FED is as you, as you have identified, what is the real risk of a, of a sharper slowdown is a normalizing economy following a pandemic the same as a, as a weak economy.

And I think that the GDP numbers yesterday should assuage some of those concerns that were in the midst of a of a more rapid slowdown.

I still think the economy is healthy and I still think um a normalizing labor market isn't a weak one.

So the, the key here for me is is to say employment growth should be slowing, but that's not because we have over hired and firms are ready to pare back.

Employment growth should be slowing because we've caught up to where we want to be.

That's a very different dynamic.

So I do think that at least in a risk dynamic story, the GDP data should give the fed less concern about a sharp slowdown in the economy resilience is the key here.

Thank you.

As always, Michael Gapen B of a securities head of us economics.