US Fed to signal more cuts ahead at September FOMC meeting: economists

Deutsche Bank economists anticipate the US Federal Reserve will implement a 25-basis point rate cut at its upcoming September FOMC meeting, projecting a total of 75 basis points in reductions for the year, bringing the fed funds rate to 3.5%-3.75% by year-end. This dovish outlook is attributed to a weakening labor market, moderating inflation, and risk management considerations, with potential for further cuts in 2026. Notably, the September decision is expected to see significant dissent among Governors, potentially marking the most since 1988.

Analysis

Deutsche Bank economists forecast a more dovish stance from the US Federal Reserve, anticipating a 25-basis point rate cut at the upcoming September FOMC meeting. They project a total of 75 basis points in reductions through the remainder of 2025, which would bring the fed funds rate to a target range of 3.5% to 3.75% by year-end. This outlook is predicated on recent data indicating a weakening labor market and moderating inflationary pressures, with the cuts framed as a risk management strategy. Notably, Deutsche Bank considers this projected year-end rate to be consistent with the neutral rate. While their base case includes no further cuts in 2026, they highlight that risks are skewed towards additional reductions, given their forecasts for inflation and employment. A significant point of uncertainty is the expectation of dissent among the Board of Governors, with the potential for three dissents for the first time since 1988, signaling a contentious internal debate on the appropriate policy path.

Key Decisions for Investors

• Investors should consider increasing exposure to duration-sensitive assets, such as long-term government bonds and growth-sector equities, to position for the forecasted 75 basis points of rate cuts by year-end.
• Monitor upcoming labor market and inflation data releases with heightened scrutiny, as any strength in these reports could challenge the dovish forecast and lead to a repricing of rate expectations.
• Prepare for potential market volatility around the September FOMC announcement, as the forecast for significant internal dissent at the Fed introduces a higher degree of policy uncertainty and the possibility of a surprise outcome.