Recently, a strategic analysis team from an investment institution proposed an interesting viewpoint — the market's expectations for the Federal Reserve's upcoming actions might be a bit too optimistic.

Their logic is as follows: from this rate hike cycle to now, the Federal Reserve has cut interest rates by a total of 175 basis points, and the policy rate is currently approaching the so-called "neutral interest rate" level. What is the neutral interest rate? Simply put, it’s the level that neither stimulates the economy excessively nor suppresses growth too much. Once near this range, the necessity and room for further monetary easing naturally diminish.

Unless the economy clearly weakens later on, especially with a sharp deterioration in the labor market, there is little reason to significantly cut rates by 2026. But looking at how the market is pricing it — based on trading data, the market is now essentially digesting the expectation of two rate cuts next year by the Federal Reserve. This creates a divergence: on one side, the market believes rate cuts will continue; on the other side, investment institutions emphasize that the room is actually limited, and further easing mainly depends on a significant deterioration in the labor market.

The actual direction still depends on economic data. If inflation doesn’t fall back as expected and economic resilience persists, the Fed may need to keep rates high for longer. Conversely, if the labor market cools rapidly, dragging down consumption and inflation, the pace of rate cuts could accelerate. However, the key point is: in the context of approaching the neutral interest rate, the likelihood of policy shifting from easing to a neutral or slightly tightening stance is increasing. Investors should be cautious about whether their expectations for rate cuts are too optimistic.