Pulles: The Fed may cut interest rates in September, asset allocation will be more inclined towards high-yield bonds

According to the Zhitong Finance and Economics APP, Tim Murray, the capital market strategist of T. Rowe Price's multi-asset department, commented on the Federal Reserve's interest rate decision. The market is currently expecting the Fed to start its rate-cutting cycle in September, but this expectation seems overly optimistic. Until the September interest rate meeting, the US will release two Consumer Price Index (CPI) data. Investors should be aware that the CPI data may fall short of expectations.

After the Fed Chairman Powell's press conference, two key points caught attention: First, Powell described the weakness in the labor market as normalization. This is important because unless the Fed sees substantial weakness in the labor market, rather than the current trend towards normalization, investors should not expect the Fed to suddenly accelerate the pace of rate cuts.

Second, a rate cut may happen at the September meeting, but it is premature to draw a final conclusion. If the trend unfolds as expected, the current market reflection of the Fed's rate cuts may be accurate: a rate cut in September, followed by a cut every quarter for the next 6 quarters; by March 2026, the federal funds rate will drop to 3.5%. However, the risk faced by this expectation is stubborn inflation, not a sudden deterioration in the labor market. Therefore, in terms of asset allocation, there will be a preference for high-yield bonds over US long-term treasuries, and a reasonable allocation of physical asset stocks in asset allocation