Federal Reserve Meeting Outlook: Russell Investments expects a "hawkish rate cut" of 25 basis points this week, with the terminal rate possibly reaching 3.25% by 2026.
Russell Investments recently released a report stating that the Federal Reserve's interest rate decision this week faces a "difficult choice." The institution noted that the U.S. economy is exhibiting a rare combination of "robust growth and weak job growth," which has directly led to internal disagreements within the Federal Reserve regarding how much policy "insurance" should be provided.
Despite the complex situation, Russell Investments still expects the Federal Reserve to implement a 25 basis point rate cut, but emphasizes that this cut will have a distinct "hawkish" tone. This also means that while the Federal Reserve cuts rates, its policy statement and subsequent communications will use extremely cautious language, aiming to clearly curb excessive easing expectations that may arise in the market.
Russell Investments' North America Chief Investment Strategist Paul Eitelman predicts that this round of easing will be prudent and limited. He expects the Federal Reserve to slow down or stop rate cuts in early 2026, with the final terminal rate landing in a range of 3.25% to 3.5%, a forecast that is much more restrained than some more optimistic market views.
In line with this policy path expectation, the report also provides clear investment guidance. Eitelman points out that the current 10-year U.S. Treasury yield is about 4.1%, which is already above the estimated fair value.
Therefore, Russell Investments recommends that investors strategically increase their allocation to duration risk in their portfolios, indicating that they foresee room for long-term interest rates to decline in the future, potentially triggering a rise in bond prices.
At the time of this analysis, subtle changes are occurring in the U.S. Treasury market. On the eve of the Federal Reserve's meeting, the 10-year U.S. Treasury yield has risen to around 4.16%, a several-month high, which is quite rare historically and may reflect deep market concerns about inflation resilience or fiscal outlook.
The report also explains that even if the Federal Reserve decides to cut rates, it must adopt a "hawkish" stance to maintain its credibility against inflation, which is the realistic context of Russell Investments' core judgment.
