Prudential: The Federal Reserve's interest rate cut target is within reach, which will help alleviate investors' concerns about fixed income assets
Prudential Vice Chairman Daleep Singh stated that the Federal Reserve is expected to initiate a new round of interest rate cuts at the September meeting, aiming for a neutral policy interest rate. Market expectations for rate cuts help alleviate investor concerns about fixed-income assets. Although inflation is expected to remain above 3% until 2026, the rate cuts will be implemented in a gradual manner of 25 basis points each time. The U.S. August non-farm payroll report shows positive signals, significantly boosting risk assets
According to the Zhitong Finance APP, the Federal Reserve will hold a monetary policy meeting on September 16 and 17, and the market generally expects the Fed to initiate a new round of interest rate cuts at that time. Daleep Singh, Vice President of Fixed Income at PGIM, Chief Global Economist, and Head of Global Macroeconomic Research, stated that the current Federal Reserve, led by Powell, has a clear target for its interest rate policy, which is to approach the estimated neutral policy interest rate level. However, there remains significant uncertainty regarding the specific steps to achieve this goal. Daleep Singh mentioned that the market's expectations for Fed rate cuts also help alleviate investors' concerns about the volatility of fixed income assets (such as long-term bonds).
Nevertheless, based on PGIM's expectation that the inflation rate will remain above 3% until 2026, the Fed is likely to continue cutting rates at a gradual pace of 25 basis points each time until it reaches the neutral interest rate range estimated by PGIM of 3.0% to 3.5% next year.
This gradual strategy will give the Fed 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 noteworthy that when Powell's term ends in mid-2026, if interest rates are further lowered below the estimated neutral rate level in an environment where inflation remains persistently above target, it could significantly enhance the tail risks in PGIM's economic scenario analysis.
Daleep Singh stated that from a market perspective, the U.S. August non-farm payroll report shows positive signals—having a mild impact on the interest rate market, while its uplifting effect on risk assets (such as stocks and corporate bonds) is more pronounced. Currently, corporate operational performance is robust, and the financial environment for the corporate sector and related asset classes is expected to become more accommodative. Considering that the yield curve is in a normal shape, the market's expectations for Fed rate cuts also help alleviate investors' concerns about the volatility of fixed income assets (such as long-term bonds)
