Deutsche Bank has updated its forecasts. It now predicts that the Federal Reserve will cut interest rates three times this year, with these cuts expected in September, October, and December. Previously, Deutsche Bank anticipated only two cuts—one in September and another in December. Matthew Luzzetti, the bank’s chief economist for the U.S., noted that while their main prediction does not include more cuts in 2026, there is a chance this could change if the labor market and inflation shift. The Federal Open Market Committee will meet on September 16 and 17.

Market Reactions to Rate Cut Predictions

In contrast, Morgan Stanley had a different view. They predicted four rate cuts by January and two more in 2026. As the September FOMC meeting approaches on the 16th and 17th, the market largely expects a 25-basis point rate cut. This signals a strong belief that the Fed will start easing this month. Traders should prepare for confirmation of this expected outcome. Recent data supports this outlook. The August 2025 Consumer Price Index (CPI) report showed core inflation is slowly decreasing to 2.8%. Additionally, the latest jobs report indicated a slowing labor market, with nonfarm payrolls adding fewer jobs than expected—only 150,000. This gives the Fed a reason to start easing its policies.

Opportunities in Trading and Investment

For those trading interest rate products, long positions in short-term interest rate futures, such as SOFR futures, could be advantageous. These contracts are valued based on future rate expectations, so their price should rise as the Fed confirms rate cuts. The forward curve is already signaling further cuts in October and December, creating opportunities for spread trades. In the equity market, this environment looks favorable for stock indices. Purchasing near-term call options or call spreads on the S&P 500 could help take advantage of any positive movement from a dovish statement by the Fed. However, since the rate cut is mostly anticipated, be aware of the risk of a “sell the news” reaction. Managing exposure to volatility is essential. We see this potential shift as akin to the Fed’s “mid-cycle adjustment” in 2019 when they proactively lowered rates to support growth. Following the aggressive rate hikes throughout 2023, this change marks a significant policy shift. Historical trends suggest that the Fed may implement more than one cut if economic data continues to weaken. Create your live VT Markets account and start trading now.

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