The Federal Reserve is preparing for a new round of interest rate cuts! Mizuho bets on "dovishness to the end": interest rates are expected to fall to 3% by March 2026.

International financial giant Mizuho recently released a research report, which showed that the institution expects the Fed to start a new round of interest rate cuts at the upcoming September monetary policy meeting, marking a shift in focus from fighting inflation to supporting growth. Mizuho stated that the key focus of the market is no longer whether there will be an interest rate cut in September, but rather whether it will be a 25 basis point cut or a 50 basis point cut, and also the focus is on the pace of rate cuts that will continue into 2026 from the end of 2025. Mizuho said that the market has reached a consensus on expected rate cuts until the end of 2025, but some institutions still predict a 50 basis point cut in September instead of 25 basis points, leading to a significant divergence in expectations for the interest rate path in 2026. Mizuho believes that the Fed will start cutting rates cautiously but steadily (though the institution does not completely rule out a more aggressive 50 basis point cut like in 2024) and then "carry through the dovish policy to the end" - in other words, Mizuho bets that the Fed will continue the trend of accommodative monetary policy in the remaining two monetary policy meetings of 2025 and lower the federal funds rate to around 3% in March 2026, which Mizuho predicts would be the "neutral" rate level. This means a significant decrease in rates from the current range of around 4.25%. Mizuho emphasizes that the rapidly cooling non-farm employment market, falling inflation, and slowing wage growth will give the Fed more room for rate cuts than before, and the Fed's policy focus will shift towards stimulating economic growth due to weak non-farm data. Therefore, the pace of rate cuts may be more aggressive than what most investors expect. Market pricing also reflects similar expectations: SOFR rate futures show that investors are betting on the Fed initiating a rate cut in September, and they are betting that cumulative rate cuts of up to 75 basis points will occur by the end of the year. Mizuho's report suggests that if recent inflation data significantly weakens, it is not ruled out that the Fed may take the more aggressive action of a 50 basis point rate cut to decisively start the easing process. In this scenario, the Fed's remaining FOMC monetary policy meetings for the rest of the year may follow a similar script to the past: in September 2024, the Fed initiated a 50 basis point cut followed by two 25 basis point cuts in the subsequent meetings, quickly lowering the policy rate by about 1 percentage point in the short term. Meanwhile, increasing bets on interest rate cuts, rising term premiums, and a steepening yield curve are pushing short-term Treasury yields significantly lower, while long-term Treasury yields remain high and could continue to rise, leading to a steepening yield curve. Mizuho's report also warns that if inflation were to rise again in the future, the Fed may be forced to temporarily reverse its accommodative policy in 2027. Wall Street financial giant Morgan Stanley's bet on the impending rate cut cycle by the Fed is almost identical to Mizuho's, with both predicting that the Fed's current rate cut cycle will continue until 2026, eventually bringing the neutral rate to around 3%. This also increases and strengthens their confidence in a steeper yield curve (i.e., long-term yields higher than short-term yields). Morgan Stanley's current basic forecast is that the Fed will cut rates by 25 basis points at the upcoming FOMC monetary policy meeting this month and will continue with similar rate cuts at every other meeting until December 2026. The extremely weak non-farm payroll data in August has led the market to anticipate a 50 basis point rate cut in September, opening the curtains on the rate cut cycle With the release of the extremely weak August non-farm payrolls data and continuously revised downward job data from previous months, the "CME FedWatch Tool" shows a 90% probability of a 25 basis point rate cut by the Fed in September, while the probability of a 50 basis point rate cut has significantly increased to 10%. Fed Chair Jerome Powell laid the groundwork for a September rate cut in a speech last month, pointing out significant risks in the US labor market. For the FOMC monetary policy meetings on October 29th and December 10th, interest rate futures traders are generally betting that the Fed will successively cut rates by 25 basis points at each meeting, indicating that the Fed could cumulatively cut rates by 100 basis points at the remaining three meetings in 2025, replicating the rate cut path from 2024. The August non-farm employment report showed an increase of only 22,000 jobs, while economists' median estimate was 75,000 jobs. The unemployment rate in August rose to 4.3%, reaching the highest level since 2021, in line with economists' estimate. Additionally, the already very weak non-farm employment numbers for June and July were further revised downward by a total of 21,000 jobs, with June's employment data being revised to negative growth - the first monthly job decline since 2020. This has prompted some interest rate futures traders to leave room for predicting a larger half percentage point rate cut, while it is now expected that the Fed will implement more accommodative measures by the end of 2025. In light of the unexpectedly weak US non-farm employment report, which highlights the possibility of a significant slowdown or even a recession in the US economy, some Wall Street investment firms believe that the Fed indeed needs to accelerate its monetary easing pace, with the likelihood of a significant 50 basis point rate cut in September on the rise. "This is the second consecutive disappointing non-farm employment report, providing important evidence for a slowdown in the US economy," said Jack Ablin, Founding Partner and Chief Investment Officer at Cresset Capital. "When you combine this with Chairman Powell's inclination towards full employment rather than price stability, it does suggest that the Fed may take action beyond its original plan." Standard Chartered Bank currently expects the Fed to cut rates by 50 basis points next week instead of the previously expected 25 basis points. Strategists John Davies and Steve Englander from Standard Chartered Bank stated: "We believe that the labor market data in August has paved the way for the Fed to in September 'catch-up' cut rates by 50 basis points, just like it did at this time last year." Market focus increasingly on the rate cut path in 2026 Regarding the expected path of Fed monetary policy in 2026, Morgan Stanley's current basic forecast is that the Fed will cut rates by 25 basis points at the upcoming FOMC monetary policy meeting this month and will continue with similar rate cuts at every other meeting until December 2026, with rate cuts in September, no action in November, rate cuts in December, and further cuts in March next year... SOFR rate futures (reflecting market expectations of future federal funds rates) currently imply a path in which the Fed will begin cutting rates soon and gradually progress over the next two years. Specifically, CME's "FedWatch" tool shows that investors believe that an upcoming Fed rate cut is almost certain: a 90% probability of a 25 basis point rate cut at the September meeting, and a roughly 10% probability of a 50 basis point cut. In other words, the market concurs that this meeting will initiate the first rate cut in nearly nine months, beginning a new accommodative cycle for the Fed. Looking ahead for the remainder of the year, SOFR rate futures pricing curves indicate that the Fed may cut rates by 25 basis points at each subsequent meeting. For example, for the FOMC meetings in late October and mid-December 2025, traders are generally betting on cuts of 25 basis points each. If three consecutive rate cuts are included starting in September, this would result in a total reduction of 100 basis points, mirroring the pace of rate cuts from the previous cycle (assuming it was in 2024). However, SOFR benchmark pricing indicates that the Fed will not continue with rate cuts until the middle of 2026, when a newly appointed Fed chair nominated by Trump comes into office. Of course, the actual policy direction will depend on economic data, but the "latest bet" in the interest rate futures market clearly reflects the mainstream expectation: the Fed will quickly shift from tightening to easing. However, there is still a significant divergence in expectations for the rate cut path in 2026. Mizuho's latest forecasts show that the institution further explores different rate paths under different scenarios: the "base scenario" assumes a moderate economic slowdown and declining inflation, with the Fed gradually cutting rates to near the neutral rate level by March next year (about 3%), and then possibly entering a "half-time pause and observe mode" - pausing rate cuts for a period to observe the specific operation of the US economy; Mizuho's "aggressive accommodative scenario" assumes that a newly appointed Fed chair nominated by Trump emphasizes growth stimulation, and further lowers rates to 2% or even lower in 2026; in contrast, the "stagflation hike scenario" assumes inflation does not decrease, but instead significantly rises due to tariffs and stimulus from rate cuts, forcing the Fed to raise rates again in 2026 to defend price stability. From the expectations of Wall Street investment firms, these financial giants generally agree on a rate cut path of around 75 basis points for the remainder of 2025, but there are disagreements about 2026 and beyond. Nick Timiraos, a Wall Street Journal reporter known as the "Fed's mouthpiece," stated after the non-farm data was released that the sharp slowdown in summer job growth, as clearly indicated by the August non-farm payroll report, almost certainly means the US employment growth has significantly slowed down since the beginning of the year, making it highly likely that the Fed will cut rates by 25 basis points in their meeting two weeks from now, but the debate on the Fed's rate cut path for 2026 will become more complex.