UBS predicts that Fed Chair Powell will advocate for rate cuts during the September FOMC meeting, unless robust labour data or unexpected inflation arises. The bank forecasts four quarter-point reductions by January 2026, starting this September.
According to UBS, US interest rates are expected to decrease, with European rates already minimal. They foresee global equities experiencing an upward trend over the next 6–12 months, supported by Fed easing and strong corporate capital expenditure growth.
Interest Rate Cuts
We believe Federal Reserve Chair Powell is preparing to advocate for an interest rate cut at the September FOMC meeting. The latest July 2025 inflation report, which showed the Consumer Price Index cooling to 2.8%, supports this view by bringing inflation closer to the Fed’s target. This economic data, combined with a slight uptick in the unemployment rate to 4.1% last month, provides the justification needed to begin an easing cycle.
Given this outlook, interest rate traders should consider positioning for lower rates ahead. One strategy is to buy futures contracts tied to the Fed Funds or SOFR rates for December 2025 and March 2026 expirations. This anticipates that the market has not yet fully priced in the full series of four rate cuts we expect by early 2026.
For equity markets, the combination of expected Fed easing and continued strong corporate capital expenditure should fuel a rally over the next six months. We are looking at buying out-of-the-money call options on the S&P 500 and Nasdaq-100 indices with expirations in late 2025. This provides a way to profit from the expected upward move in stocks as borrowing costs decrease.
Market Volatility and Dollar Weakness
The weeks leading up to the September meeting will likely see a rise in market volatility as traders position for the announcement. A historical look at the start of the 2019 easing cycle shows a similar increase in implied volatility right before the first cut. Traders could buy VIX futures or options as a short-term play on this expected uncertainty.
This policy shift should also weaken the U.S. dollar, especially since European central bank rates are expected to remain stable near their current lows. We see an opportunity in shorting the dollar against major currencies. A long position in EUR/USD futures could be an effective way to trade on the narrowing interest rate differential between the U.S. and Europe.
