The new round of interest rate cuts by the Federal Reserve is poised to begin! Mizuho bets on "a dove all the way": interest rates are expected to drop to 3% by March 2026

According to the Zhitong Finance APP, a recent research report released by international financial giant Mizuho indicates that the institution expects the Federal Reserve to initiate a new round of interest rate cuts at the upcoming September monetary policy meeting, marking a shift in the Fed's policy focus from combating inflation to supporting growth. Mizuho stated that the core focus of the market is no longer whether there will be a rate cut in September, but rather whether the cut will be 25 basis points or 50 basis points, as well as the continuation of the rate cut pace that will begin at the end of 2025 into 2026. Mizuho noted that the market has reached a consensus on the expectation of rate cuts until the end of 2025, but some institutions still predict a 50 basis point cut in September instead of 25 basis points, with significant divergence regarding the interest rate path in 2026.

Mizuho believes that the Federal Reserve will begin cutting rates at a cautious but determined pace (though the institution has not completely ruled out the possibility of an aggressive 50 basis point cut like in 2024 to kick off the cycle), and then "will fully implement a dovish easing policy"—that is, Mizuho bets that the Fed will continue the trend of easing monetary policy in the remaining two monetary policy meetings of 2025 and will lower the federal funds rate to around 3%, which Mizuho predicts to be the "neutral" rate level in March 2026, indicating a significant cooling from the current rate range of about 4.25%.

Mizuho emphasized that the rapid cooling of the non-farm employment market, falling inflation, and slowing wage growth will provide the Federal Reserve with a broader space for rate cuts than previously anticipated, and the Fed's policy focus will shift towards stimulating economic growth due to weak non-farm data, suggesting that the pace of rate cuts may be more aggressive than most investors expect. Market pricing also reflects similar expectations: the SOFR futures curve shows that investors are betting on the Fed starting a "rate cut wave" in September, with cumulative cuts expected to reach 75 basis points by the end of the year.

Mizuho's report suggests that if recent inflation data significantly weakens, there is a possibility that the Federal Reserve may take an aggressive 50 basis point cut to "hammer home" the start of the easing process. In this scenario, the remaining FOMC monetary policy meetings for the year may follow a past script: in September 2024, the Fed cuts rates by 50 basis points to kick off, followed by two subsequent meetings each cutting 25 basis points, thereby quickly lowering the policy rate by about 1 percentage point in the short term.

Meanwhile, the rising bets on rate cuts and increasing term premiums are driving short-term U.S. Treasury yields down significantly, while long-term Treasury yields remain high and may continue to rise, leading to a transition in the yield curve from inversion to steepening. Mizuho's report also warns that if inflation rises again in the future, the Federal Reserve may be forced to phase out its easing policy by 2027.

Wall Street financial giant Morgan Stanley's bets on the upcoming rate cut cycle by the Federal Reserve are almost identical to those of Mizuho, with both giants predicting that this round of rate cuts will last until 2026, bringing the neutral rate to around 3%. This also increases and strengthens their confidence that the U.S. Treasury yield curve will become steeper (i.e., long-term yields will be much higher than short-term yields). Morgan Stanley's current basic prediction is that the Federal Reserve will cut rates by 25 basis points at this month's FOMC monetary policy meeting and will implement a similar rate cut pace at every other meeting until December 2026 Extremely Weak Non-Farm Payrolls Lead Market to Anticipate a 50 Basis Point Rate Cut in September, Kicking Off the Easing Cycle

The extremely weak August non-farm payroll data, along with the continuously revised down employment figures from previous months, have led the "CME FedWatch Tool" to show a 90% probability of a 25 basis point rate cut by the Federal Reserve in September. Notably, the probability of a 50 basis point cut has risen significantly from zero before the non-farm report to 10%. Federal Reserve Chairman Jerome Powell laid the groundwork for a September rate cut last month, highlighting significant risks in the U.S. labor market.

For the FOMC monetary policy meetings on October 29 and December 10, interest rate futures traders are generally betting that the Federal Reserve will consecutively cut rates by 25 basis points, anticipating a total of 100 basis points in cuts across the remaining three meetings in 2025, mirroring the rate cut path of 2024.

The non-farm employment report revealed that non-farm payrolls increased by only 22,000 in August, while the median economist estimate was 75,000. The unemployment rate rose to 4.3%, the highest since 2021, consistent with the median economist estimate. Additionally, the already weak non-farm payroll figures for June and July were revised down by a total of 21,000, with June's employment data revised to negative growth—marking the first monthly decline in employment numbers since 2020. This has led some interest rate futures traders to leave room for a larger half-point rate cut in their forecasts, with expectations of more easing measures from the Federal Reserve by the end of 2025.

In light of this unexpectedly weak U.S. non-farm employment report, which highlights the potential for a significant slowdown in the U.S. economy and even a possible recession, some Wall Street investment firms believe the Federal Reserve indeed needs to accelerate its monetary easing pace, including the rising possibility of a substantial 50 basis point cut this month.

"This is the second consecutive disappointing non-farm payroll report, which undoubtedly provides significant evidence for a slowdown in the U.S. economy," said Jack Ablin, founding partner and chief investment officer at Cresset Capital. "When you combine this with Chairman Powell's tendency to prioritize full employment over price stability, it does suggest that the Federal Reserve may take actions beyond what was originally planned."

Standard Chartered currently expects the Federal Reserve to cut rates by 50 basis points next week, rather than the previously anticipated 25 basis points. Strategists John Davies and Steve Englander from Standard Chartered stated, "We believe that the August labor market data has opened the door for a 'catch-up' 50 basis point rate cut by the Federal Reserve in September, just like this time last year." The market is increasingly focused on the interest rate cut path in 2026

Regarding the expected monetary policy path of the Federal Reserve in 2026, Morgan Stanley's current baseline forecast is that the Federal Reserve will cut rates by 25 basis points at this month's FOMC monetary policy meeting and will implement similar rate cuts at every other meeting until December 2026, i.e., a rate cut in September, no change in November, a rate cut in December, and another cut in March next year...

SOFR rate futures (which reflect market expectations for future federal funds rates) currently imply that the Federal Reserve will begin cutting rates soon and will continue to do so over the next two years. Specifically, CME's "FedWatch" tool shows that investors believe a rate cut at the upcoming Federal Reserve meeting is almost a certainty: the probability of a 25bp cut at the September meeting is as high as 90%, with about a 10% chance of a one-time cut of 50 basis points. In other words, the market consensus is that this meeting will initiate the first rate cut in nearly nine months, starting a new easing cycle for the Fed.

Looking ahead to the remainder of this year, the SOFR rate futures pricing curve indicates that the Federal Reserve may cut rates by 25 basis points at each subsequent meeting. For example, for the FOMC meetings at the end of October and mid-December 2025, traders generally bet on a 25bp cut at each meeting. If there are three consecutive cuts including September, the total reduction will reach 100 basis points, mirroring the pace of the previous round (assumed to be in 2024). However, SOFR benchmark pricing suggests that the Fed will not continue the rate-cutting pace initiated in 2025 until mid-2026, when the new Fed chair nominated by Trump takes office, which may then drive the rate-cutting process.

Of course, the actual policy direction still depends on economic data, but the "latest bets" in the interest rate futures market clearly reflect mainstream expectations: the Federal Reserve will quickly shift from tightening to easing, but there are significant divergences regarding the rate cut path in 2026.

Mizuho's latest forecast further explores the interest rate path under different scenarios: the "baseline scenario" assumes a moderate economic slowdown and declining inflation, with the Federal Reserve gradually cutting rates to near neutral levels (i.e., reducing rates to about 3% by March 2026) before potentially entering a "pause and observe mode"—that is, pausing rate cuts for a period to observe the specific economic conditions in the U.S.; Mizuho's "aggressive easing scenario" assumes that the new Fed chair nominated by Trump places greater emphasis on stimulating growth, further lowering rates to 2% or even lower in 2026; Relatively, the "stagflation interest rate hike scenario" assumes that inflation does not decrease, but instead rises sharply under tariffs and interest rate cuts, forcing the Federal Reserve to raise interest rates again after 2026 to defend price stability. According to the expectations of Wall Street investment institutions, these financial giants generally agree on a rate cut path of about 75 basis points for the remainder of 2025, but there are certain disagreements regarding 2026 and beyond.

Nick Timiraos, a journalist for The Wall Street Journal known as the "Fed's mouthpiece," stated after the non-farm payroll data was released that employment growth sharply slowed this summer. The August non-farm employment report clearly indicates that job growth in the U.S. has significantly cooled since the beginning of the year, making it almost certain that the Federal Reserve will cut rates by 25 basis points at its meeting in two weeks. However, the debate regarding the Fed's rate cut pace in 2026 will become more complex