Deutsche Bank has adjusted its predictions and now expects the Federal Reserve to implement three 25 basis point rate cuts this year. These reductions are anticipated to occur at the Federal Open Market Committee meetings in September, October, and December. Previously, Deutsche Bank foresaw only two cuts, scheduled for September and December.
Matthew Luzzetti, the bank’s U.S. chief economist, mentioned that while their main scenario does not predict further cuts in 2026, there remains a possibility of this happening as changes in the labour market and inflation continue. The Federal Open Market Committee is set to convene on September 16 and 17.
Market Responses to Rate Cut Predictions
In contrast, an earlier forecast from Morgan Stanley predicted four consecutive rate cuts by January, along with an additional two in 2026.
With the September FOMC meeting just days away on the 16th and 17th, the market has almost fully priced in a 25-basis point rate cut. This reflects a growing consensus that the Fed will begin an easing cycle this month. Traders should position for confirmation of this widely held view.
This expectation is supported by the latest data we’ve seen. The August 2025 CPI report showed core inflation continuing its slow descent to 2.8%, while the most recent jobs report indicated a cooling labor market with nonfarm payrolls adding a less-than-expected 150,000 jobs. This gives the Fed the green light to begin easing policy.
Opportunities in Trading and Investment
For those trading interest rate products, this means long positions in short-term interest rate futures, like SOFR futures, could be beneficial. These contracts are priced based on future rate expectations, so their value should increase as the Fed confirms the cut. The forward curve is already anticipating further cuts in October and December, presenting opportunities in spread trades.
In the equity space, we see this as a supportive environment for stock indices. Buying near-term call options or call spreads on the S&P 500 could capture the upside from a dovish Fed statement. However, with the cut largely priced in, a key risk is a “sell the news” reaction, so managing volatility exposure is critical.
We are viewing this potential pivot as similar to the Fed’s “mid-cycle adjustment” back in 2019, where they cut rates proactively to sustain the expansion. After the aggressive hiking cycle we witnessed through 2023, this shift marks a significant change in policy. This historical precedent suggests the Fed may not stop at just one cut if the data continues to soften.
