TD Bank has upped its call for US rate cuts this year, but cautions central bankers against going too far and sparking another bubble.

“In the U.S., it seems to be an increasingly difficult task to look for the silver lining in the economy, as the economic data continues to disappoint,” it says in a research note. “But despite this increasingly dour tone for the US economy, it still does not promise recession in our view.”

The bank’s economists predict that the US Federal Reserve Board will continue to provide monetary stimulus for the next several months. “Given that the economic data has been worse than expected over the course of the last month, we have tweaked our expectations for the Fed,” it says.

It is now predicting three 25 basis point rate cuts, up from the two it was expecting previously. But this forecast is still not as aggressive as the five to six rate cuts that the market is currently pricing in, it notes.

It warns that a prolonged spate of rate cuts threatens to reflate some new bubble. “The market not only needs the steady hand of the Fed, but also the discipline that comes from allowing market forces to find equilibrium again,” TD says.

As for the Bank of Canada, TD is now looking for Canadian GDP to post 1.9% growth in 2008. “With inflation so low, the Bank of Canada can buy an insurance policy for the Canadian economy by cutting now and asking questions later. As such, we are now looking for two 25 bps rate cuts from the Bank, bringing the overnight rate down to 3.75% in March,” it concludes.