The Federal Reserve is expected to begin a rate-cutting cycle next week, with the market focusing on the direction of the 10-year U.S. Treasury yield

According to the Zhitong Finance APP, as the Federal Reserve's interest rate meeting approaches next week, the market generally expects the central bank to initiate a new round of interest rate cuts. Investors are closely monitoring the performance of the U.S. 10-year Treasury yield, which is considered a key indicator for assessing the extent of monetary policy easing and inflation expectations.

Phil Camporeale, a strategist at JP Morgan Asset Management, stated that the Federal Reserve has finally entered a "rate cut window" as the U.S. labor market has significantly slowed down and is currently in a "stagnation state," with neither significant hiring nor large-scale layoffs. "A lower federal funds rate will provide more 'breathing space' for the job market," he pointed out, adding that for rate cuts to truly support the economy, the 10-year Treasury yield must remain around the current level of approximately 4%.

As of Friday, the 10-year Treasury yield slightly increased to 4.058%. Camporeale explained that the 10-year yield is a core indicator that drives mortgage rates and corporate borrowing costs. If the yield rises, borrowing costs will increase accordingly, while a reduction in the Federal Reserve's short-term rates means lower returns for money market funds, creating a "divergence" that is unfavorable for economic stimulus.

The latest preliminary consumer confidence survey from the University of Michigan for September shows a decline in consumer confidence, while long-term inflation expectations rose for the second consecutive month to 3.9%, still below April's 4.4%. On April 2 of this year, President Trump announced a large-scale "Liberation Day" tariff policy, which once caused market turbulence and raised investor concerns about inflation. However, Camporeale noted that the impact of tariffs on prices is "moderately released," currently only gradually pushing up commodity prices and may become a one-time price adjustment rather than a sustained inflationary pressure.

According to the latest data from the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) in the U.S. rose 2.9% year-on-year in August, while the core CPI increased by 3.1% year-on-year. Mohit Mittal, Chief Investment Officer of Pimco's Core Strategy, stated that although inflation remains above the Federal Reserve's 2% target, given the significant weakening of the labor market, "considering a rate cut is a prudent move for the Federal Reserve."

Mittal expects the Federal Reserve to cut rates by 25 basis points at the policy meeting on September 16-17, but does not rule out the possibility of discussing a one-time cut of 50 basis points. He added, "The current target range of 4.25%-4.50% for the federal funds rate seems high in the current economic environment." However, he does not believe the U.S. economy will fall into recession, but expects the Federal Reserve to continue cutting rates in the first half of next year to gradually adjust the policy rate from "restrictive levels."

CME FedWatch tool data shows that traders expect the Federal Reserve to cut rates by 25 basis points at each of the remaining three interest rate meetings this year, which would bring the federal funds rate down to the range of 3.50%-3.75% by the end of the year. The market also anticipates that by the end of June 2026, this rate may further drop to 3.00%-3.25%.

Mittal expects U.S. inflation to fall to around 3% by the end of 2025 and further decrease to 2.5% by the end of 2026. Data from the St. Louis Fed's website shows that the five-year breakeven inflation rate recently reported at 2.41%, indicating that investors still believe the Federal Reserve can control inflation Camporeale predicts that the actual GDP growth in the U.S. will be 1% in 2025 and about 2% in 2026, and believes that the Federal Reserve may continue to cut interest rates against the backdrop of a still robust economic performance. He pointed out that the current pricing in the federal funds futures market shows that investors expect the Federal Reserve to behave more dovishly in 2026, possibly accelerating the return of interest rates to a "neutral level."

Despite the market's optimism about the prospects of interest rate cuts, Camporeale warns that the biggest risk lies in inflation expectations losing their anchor. "If the Federal Reserve eases policy too early while inflation is not yet close to the 2% target, it could trigger market volatility."

On Friday, U.S. stocks showed mixed performance. The Nasdaq Composite Index rose 0.44%, reaching a new all-time high; the S&P 500 Index fell slightly by 0.05%; the Dow Jones Industrial Average dropped by 0.59%. All three major indices recorded weekly gains, with the S&P 500 Index less than 0.1% away from the all-time high set on Thursday