Bank of America (NYSE:BAC) warned that the Federal Reserve risks making a policy mistake if it begins to cut interest rates next month, despite President Jerome Powell's dovish tone at Jackson Hole.

"In the absence of further deterioration in the labor market, we believe the Fed will risk a policy mistake if it cuts interest rates," the bank wrote.

"We see signs that economic activity has improved after a period of weakness in the first half of the year. If that is true, the labor market is likely to recover as well. Meanwhile, the core inflation picture has not improved—except for tariffs—since the Fed began cutting last year."

Bank of America noted that while housing-related inflation has decreased, other categories have remained steady or increased.

Powell, speaking in Wyoming, said that "the balance of risks appears to be shifting" toward the labor market, noting concerns about wage revisions and the potential for rising unemployment.

"The core outlook and the shift in the balance of risks may require us to adjust our policy stance," it added.

Bank of America said those comments were more dovish than it and the markets expected, and that Powell was "clearly rattled by the downside wage revisions."

Markets reacted by increasing bets on a cut in September, adding nearly 4 basis points of easing in futures. However, Bank of America maintains its forecast of no action being taken.

The bank said that a 4.2% unemployment rate with job growth of 70,000 or more could keep the current rate intact, although a weaker outcome would lean toward easing. Inflation data, including the Consumer Price Index and Producer Price Index for August, will also be crucial.

Bank of America compared Powell's tone this year to 2024, when he announced that "the time has come to adjust policy" and indicated the beginning of a cutting cycle.

Now, with interest rates already down by 100 basis points and inflation rising, the bank argued that the Fed's risks are tilted toward the upside, making early easing more perilous.

Barclays (LON:BARC) said yesterday that it has revised its forecasts, moving one of its expected cuts for 2026 to September, noting that the threshold for consecutive or larger cuts remains high.