Fed To Cut Rates By 200 Basis Points By Early 2026, Says Mark Matthews

The US Federal Reserve's monetary policy easing will expectedly start in September and the interest rate can reach 3.25% by summer of 2026, according to Julius Baer's Managing Director Mark Matthews.

In July, the Federal Open Market Committee maintained its key interest rate at 5.25–5.5% for the eighth consecutive time. The projection of 3.25% means interest rate coming down by 200 basis points, or as many as eight rate cuts, considering Fed has been reduces them in multiples of 25 basis points lately.

Fed Chair Jerome Powell's comments during last week's Jackson Hole address contrasted with other central bank officials, Matthews told NDTV Profit. "Powell did not use any language that his colleagues have been using, like 'methodical' or 'gradual', to describe the impending rate cuts. He is referring the cuts could be quite rapid."

The softening of the US labour market is debatable, according to Matthews. "The rise in unemployment looks more driven by confidence in the economy and people coming back into the job market," he said.

"Derivatives that track the Fed funds rate are implying aggressive rate cuts. We're looking for terminal rate of 3.25% by summer of 2026," Matthews said.

A weaker US dollar is reflecting a dovish Fed and will benefit other currencies, he said. The dollar index, which tracks its performance against a basket of 10 leading global currencies, fell 0.18% to 100.53 on Monday.

Moreover, allocation in the fixed income basket will shift from short-dated securities to longer tenure Treasuries and investment-grade corporate bonds. On the equities side, US corporate earnings will remain strong which will keep stocks higher, Matthews said.

Indian equities, though currently overvalued, will outperform the US in the next five years, he said. In the short term, as long as the bull market in the US is intact, investors will not go to other parts of the world, he said.

Last week, Powell's highly anticipated speech bolstered expectations for an interest rate cut at the Fed's upcoming meeting on Sept. 17-18. "The time has come for policy to adjust," Powell said.

While the direction for policy changes is clear, the timing and pace of rate cuts will be guided by incoming data, the evolving economic outlook, and the balance of risks, he had emphasised.

Powell expressed increased confidence that inflation is progressing towards the Fed's 2% target, but noted a significant cooling in the labour market. "We do not seek or welcome further cooling in labour market conditions," he had said.