TD Economics has pushed back its timeline for interest rate cuts in the United States and Canada, and says the U.S. cuts will be smaller than it previously predicted.

In a new report, TD says that its view has been that the US Federal Reserve Board would start to cut rates in January of next year. “Obviously, that view is now untenable. The economic backdrop has not deteriorated enough, and the inflation risks remain too high, for the Fed to contemplate easier policy,” it says.

“Nonetheless, we remain of the view that the housing market will continue to lose ground in the months ahead, and the impact of evaporating housing wealth will eventually spill over to consumer spending. Correspondingly, we still believe that the next move by the Fed will be to ease. It will just not happen in January,” it says.

TD is now calling for a first cut at the tail end of the first quarter, at the March 21 FOMC meeting. “By that time, we expect that the Fed will have a few quarters of below-potential growth to mull over, and the balance of risks will have tilted from higher inflation to lower growth,” TD says. “In the same vein, instead of 100 basis points in easing, we are now looking at 75 bps in rate cuts.”

As for the Bank of Canada, it is not expecting a cut before April. “And as was the case in our previous outlook, we are still expecting a total of 50 bps of easing,” it says.

“On the Canadian side, our decision to push out the first Bank of Canada rate cut is largely the result of the Bank of Canada’s own take on the economy rather than any unexpected developments on the economic front. Although it downgraded its growth forecast – and justifiably so – in its most recent Monetary Policy Report, the Bank of Canada also downgraded its estimate of potential growth. As a result, it still sees the economy operating at its capacity limits through 2008, even with its lower growth forecast,” TD notes.

“We still believe the Bank of Canada’s growth forecast to be too optimistic. However, with its lower estimate of the economy’s cruising speed, it will take a noticeable U.S.-triggered weakening in Canada’s economic prospects to get it to cut. And, that will probably take a bit longer than we thought,” it adds.

“What about the bond market? We still expect the market will rally and the 2-10 curve will steepen from these levels (with the 2-year rallying more than the 10) but we have also pushed out the timeline on that front. The markets will need to have a convincing signal from the Fed before starting to bank heavily on rate cuts, and we are visibly not there yet,” it says.