Investing.com -- Deutsche Bank analysts predict the Federal Reserve will implement a 25-basis-point rate cut in December, followed by an "extended pause" that keeps interest rates above 4% through 2025.
This outlook reflects the impact of anticipated economic policy changes under the incoming Trump administration and persistent inflationary pressures.
The analysts highlight that while "the Republican sweep in the 2024 election promises transformative changes," policies such as higher tariffs and deregulatory measures will likely boost growth to 2.5% in 2025 but also lead to inflation stalling "at or above 2.5% through 2026."
These conditions are deemed hawkish for the Fed, which Deutsche Bank (ETR:DBKGn) expects to maintain a "moderately restrictive stance" to manage inflation risks.
Chair Jerome Powell has downplayed residual seasonality in inflation data but acknowledged the challenge posed by persistently high core PCE readings.
Deutsche Bank notes that if the January 2025 print remains elevated, it could prevent further rate cuts in early 2025.
The bank's note contrasts current conditions with the 2019 tariff-induced slowdown, emphasizing that inflation today is "meaningfully above target" and that the Fed must prioritize preventing inflation expectations from drifting higher.
While the central bank previously responded to trade-related supply shocks with dovish policies, Deutsche Bank analysts now see a hawkish stance as necessary.
Looking forward, they anticipate two-sided risks to the Fed’s outlook reemerging. If inflation proves more persistent or labor market conditions tighten, "the Fed could drop its easing bias" and maintain rates at a higher level for longer.
Deutsche Bank concludes that the Fed’s approach will remain data-dependent, but an extended pause above 4% reflects the evolving economic and inflationary landscape heading into 2025.