Mizuho Bank: The Federal Reserve has been "slapped in the face" by reality, and the easing cycle is about to start

Mizuho Bank said the US non-farm payrolls report for August further confirmed the weaker tone of the labour market, with employment, hours worked and income growth falling back to epidemic levels. The Fed is almost certain to cut interest rates at its September meeting, regardless of inflation. A 25 basis point cut is almost on the DingTalk board, but a 50 basis point cut is more likely if August inflation is weaker than expected. The Fed's previous inflation forecasts have been "slapped in the face" by reality, while its 2026 unemployment forecast is at risk of not being fulfilled. They had been too pessimistic about inflation and too optimistic about the labour market. The Fed is expected to embark on a sustained easing cycle with the goal of reducing interest rates to what it considers "neutral", around 3 per cent by March 2026. The new Fed chair is likely to further up the ante, bringing rates closer to 2 per cent. The risk, however, is that if inflation picks up again, at least some of the stimulus will be withdrawn by 2027.