Mizuho Bank stated that the August US nonfarm payrolls report clearly revealed the weakening of the labor market. According to the report, employment, working hours, and income growth rates have fallen back to pandemic-era levels.
The bank stated that regardless of inflation’s trajectory, the Fed is almost certain to cut interest rates at its September meeting. While a 25 basis point cut is seen as the baseline scenario, a 50 basis point cut is more likely if August inflation falls below expectations.
According to Mizuho, the Fed’s previous inflation forecasts have been “disappointed by reality,” and its 2026 unemployment rate target is also in jeopardy. The bank argued that the Fed was being too pessimistic about inflation and too optimistic about the labor market.
The Fed is expected to enter a sustained interest rate reduction cycle in the coming period, bringing interest rates to a “neutral” level of around 3% by March 2026. The possibility of the new Fed chair increasing stimulus and lowering interest rates to as low as 2% is prominent.
However, Mizuho noted that the biggest risk is a resurgence of inflation, in which scenario at least some stimulus could be withdrawn by 2027.
*This is not investment advice.