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The U.S. Federal Reserve’s easing cycle will be “mild” by historical standards when it starts cutting rates at its September policy meeting, ratings agency Fitch said in a note.

In its global economic outlook report for September, Fitch forecast a 25-basis-point cut at each of the central bank’s September and December meetings, followed by cuts of 125 basis points in 2025 and 75 basis points in 2026.

This will result in a total of 250 basis points of cuts in 10 moves over 25 months, Fitch noted. The agency also mentioned that the median cut from peak rates to bottom in previous Fed easing cycles up to the mid-1950s was 470 basis points, with a median duration of 8 months.

“One reason we expect Fed easing to proceed at a relatively gentle pace is that there is still work to do on inflation,” the report said.

This is because CPI inflation is still above the Fed’s stated inflation target of 2%.

Fitch also highlighted that the recent decline in core inflation — excluding prices of food and energy — mostly resulted from a drop in automobile prices, which may not be a lasting trend.

U.S. inflation in August decreased to its lowest level since February 2021, according to a Labor Department report on Wednesday.

The consumer price index rose 2.5% year-on-year in August, lower than the expected 2.6% by Dow Jones, marking its lowest rate of increase in 3½ years. On a month-on-month basis, inflation rose 0.2% from July.

Core CPI, which excludes volatile food and energy prices, increased by 0.3% for the month, slightly higher than the estimated 0.2%. The 12-month core inflation rate remained at 3.2%, in line with the forecast.

Fitch also noted that “The inflation challenges faced by the Fed over the past three and a half years are also likely to engender caution among FOMC members. It took far longer than anticipated to tame inflation, and gaps have been revealed in central banks’ understanding of what drives inflation.”

In Asia, Fitch expects that rate cuts will continue in China, noting that the People’s Bank of China’s rate cut in July caught market participants by surprise. The PBOC reduced the 1-year MLF rate to 2.3% from 2.5% in July.

“Expected Fed rate cuts and the recent weakening of the US dollar have provided room for the PBOC to further reduce rates,” the report said, mentioning that deflationary pressures were becoming entrenched in China.

Fitch pointed out that “Producer prices, export prices, and house prices are all declining, and bond yields have been decreasing. Core CPI inflation has dropped to just 0.3%, leading to a revision of CPI forecasts.”

The agency now predicts China’s inflation rate to be at 0.5% in 2024, down from 0.8% in its June outlook report.

Fitch forecast an additional 10 basis points of cuts in 2024 and another 20 basis points of cuts in 2025 for China.

On the contrary, Fitch observed that “The Bank of Japan is diverging from the global trend of policy easing and raised rates more aggressively than anticipated in July. This reflects its growing belief that reflation is firmly established.”

With core inflation surpassing the BOJ’s target for 23 consecutive months and companies willing to provide substantial wage increases, Fitch stated that the current situation differed significantly from the “lost decade” in the 1990s when wages stagnated amid enduring deflation.

This aligns with the BOJ’s objective of a “virtuous wage-price cycle,” boosting the BOJ’s confidence to continue raising rates towards neutral levels.

Fitch anticipates the BOJ’s benchmark policy rate to reach 0.5% by the end of 2024 and 0.75% in 2025, further suggesting that “we expect the policy rate to reach 1% by end-2026, above consensus. A more hawkish BOJ could continue to have global ramifications.”