Deutsche Bank Sees Fed Pause After December Rate Cut"
Deutsche Bank analysts forecast that the Federal Reserve will implement a 25-basis-point rate cut in December, followed by an extended pause, keeping interest rates above 4% through 2025. This outlook is shaped by anticipated policy changes under a potential Trump administration and ongoing inflationary pressures.
The analysts note that the expected "Republican sweep" in the 2024 election could lead to significant policy shifts. Measures such as higher tariffs and deregulation could boost economic growth to 2.5% in 2025, but these policies may also result in inflation remaining above 2.5% through 2026.
In response to these conditions, which are viewed as hawkish, Deutsche Bank anticipates that the Fed will maintain a "moderately restrictive stance" to combat inflation risks. While Fed Chair Jerome Powell has downplayed seasonality in inflation data, he has acknowledged the persistent challenge of high core PCE readings.
The analysts also point out that if inflation remains elevated in January 2025, it could hinder further rate cuts in the early part of that year. They compare current conditions with the 2019 tariff-related slowdown, noting that inflation is now "significantly above target," requiring the Fed to focus on preventing inflation expectations from rising.
Whereas the Fed previously adopted dovish policies in response to trade-related supply shocks, Deutsche Bank now sees a hawkish approach as necessary. Looking ahead, they foresee two-sided risks to the Fed’s outlook. If inflation persists or labor market conditions tighten, the Fed may abandon its easing bias and keep rates elevated for longer.
In conclusion, Deutsche Bank suggests that while the Fed’s stance will remain flexible and data-dependent, an extended pause above 4% will likely be the central bank's approach as it navigates evolving economic and inflationary challenges through 2025.
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