The Fed is expected to start a rate-cutting cycle next week, with the market focusing on the direction of the 10-year US Treasury yield.

As the Federal Reserve's interest rate meeting next week approaches, the market generally expects the central bank to start a new round of interest rate cuts. Investors are closely watching the performance of the U.S. 10-year Treasury bond yield, which is considered a key indicator for assessing the extent of monetary policy easing and inflation expectations. Phil Camporeale, a strategist at J.P. Morgan Asset Management, said that the Federal Reserve has finally entered a "window of interest rate cuts" because the U.S. labor market has significantly slowed down and is currently in a "stagnant state" with no clear hiring or massive layoffs. "Lower federal funds rates will provide more 'breathing space' for the job market." He pointed out that in order for interest rate cuts to truly support the economy, the 10-year U.S. Treasury bond yield must remain near its current level of about 4%. As of Friday, the 10-year Treasury bond yield had slightly risen 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, while a decrease in the Federal Reserve's short-term interest rates means lower returns for money market funds, which is not conducive to economic stimulus. The latest preliminary survey of consumer confidence from the University of Michigan for September showed a decline in consumer confidence, while long-term inflation expectations rose for the second consecutive month to 3.9%, still below the 4.4% in April. On April 2, U.S. President Trump announced the implementation of a large-scale "Liberation Day" tariff policy, which briefly caused market volatility as investors worried about its impact on inflation. However, Camporeale pointed out that the impact of tariffs on prices has been "moderately released," currently only gradually pushing up prices of goods, and may be a one-off price adjustment rather than sustained inflation pressure. According to the latest data from the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) in the U.S. rose by 2.9% year-on-year in August, while the core CPI rose by 3.1% year-on-year. Mohit Mittal, chief investment officer for core strategies at Pimco, said that despite inflation still being above the Fed's 2% target, given the apparent weakness in the labor market, "the Fed's consideration of interest rate cuts is a cautious move." Mittal expects the Fed 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 50 basis point cut. He added, "The current target range of 4.25%-4.50% for the federal funds rate seems relatively high in the current economic environment." However, he does not believe that the U.S. economy will fall into a recession, and expects the Fed to continue cutting rates in the first half of next year to gradually retreat from a "restrictive level" of policy rates. Data from the CME FedWatch tool shows that traders expect the Fed to cut rates by 25 basis points at each of the remaining three interest rate meetings this year, which would bring the year-end federal funds rate to the range of 3.50%-3.75%. The market also expects that by the end of June 2026, the rate may further descend to the range of 3.00%-3.25%. Mittal predicts that U.S. inflation will fall to about 3% by the end of 2025, and further drop to 2.5% by the end of 2026. Data from the St. Louis Fed website shows that the five-year break-even inflation rate recently reported 2.41%, indicating that investors still believe the Fed can control inflation. Camporeale predicts that U.S. real GDP will grow by 1% in 2025 and around 2% in 2026, and believes that the Fed may continue cutting rates against a backdrop of steady economic performance. He pointed out that the current pricing in the federal funds futures market shows that investors expect the Fed to be more dovish in 2026, which may accelerate the return of rates to a "neutral level." Despite the market's optimism about the prospects for rate cuts, Camporeale warned that the biggest risk lies in the loss of anchor for inflation expectations, "If the Fed prematurely loosens policy before inflation approaches the 2% target, it could trigger market volatility." On Friday, the U.S. stock market showed mixed performance. The Nasdaq Composite Index rose by 0.44%, reaching a new historical high; the S&P 500 index fell slightly by 0.05%; the Dow Jones Industrial Average fell by 0.59%. All three major indexes recorded weekly gains, with the S&P 500 index less than 0.1% away from the historical high set on Thursday.