Federal Reserve Expected to Start Rate Cuts September 16-17

The Federal Reserve is scheduled to hold its monetary policy meeting on September 16th and 17th, with market participants widely expecting the central bank to commence a new cycle of interest rate reductions. Daleep Singh, Vice Chairman of Fixed Income at PGIM, Chief Global Economist, and Head of Global Macroeconomic Research, has articulated that the current Federal Reserve, under the leadership of Jerome Powell, has a clear policy objective: to approach the estimated neutral policy rate level. However, the precise steps to achieve this goal remain uncertain.

Singh highlighted that market expectations for a Federal Reserve rate cut would help alleviate investor concerns about the volatility of fixed-income assets, such as long-term bonds. Despite this, PGIM anticipates that inflation rates will remain above 3% until 2026, leading the Federal Reserve to continue reducing rates gradually by 25 basis points until it reaches the estimated neutral rate range of 3.0% to 3.5% by next year. This gradual approach will provide the Federal Reserve with ample time to assess the impact of tariff policies on inflation and labor supply, as well as the subsequent effects of fiscal policy.

It is worth noting that if Powell's term ends in mid-2026 and the Federal Reserve further reduces rates below the estimated neutral rate level in an environment of sustained high inflation, it could significantly increase the tail risks in PGIM's economic scenario analysis. From a market perspective, Singh analyzed that the August non-farm payroll report in the United States showed positive signs, with a moderate impact on the interest rate market and a more significant boost to risk assets such as stocks and corporate bonds. Currently, corporate performance is stable, and the financial environment is expected to become more accommodative for the corporate sector and related asset classes. Given the normal shape of the yield curve, market expectations for a Federal Reserve rate cut would help alleviate investor concerns about the volatility of fixed-income assets, such as long-term bonds.