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FED: Deutsche Now Sees More Extensive Cuts

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Ahead of next week's FOMC decision, Deutsche Bank has adopted a more dovish view on the path of Fed rates "to reflect the emergence of downside risks to the labor market": 

  • Deutsche analysts maintain their long-standing expectation of 25bp cuts at the last 3 meetings of 2024, but now see consecutive cuts extending through the March 2025 meeting for 125bp of cuts to that point, then shifting to a quarterly cut pace (Jun, Sep, Dec) for 200bp total by end-2025 to 3.25-3.50%.
  • They had for some time expected a 75bp "mid-cycle adjustment as a sufficient upfront response. We no longer view this response as adequate" on account of the "continued cooling in the US labor market" which "raises downside risks to the economy", with a "strong case for a more regular cadence of rate cuts that hastens the return of the fed funds rate to neutral". As part of their "mid-cycle adjustment view", they had previously seen rate cuts pausing at end-2024 then continuing in 2H 2025 (50bp) and 25bp in 1Q26 to 3.75-4.00%. 
  • As reflected in the new rate path, Deutsche regards neutral at around 3.5% (25bp below their previous forecast).
  • The most pronounced risk is that "the labor market weakens further in the near-term, causing the Fed to reduce rates by larger increments...Risks to the hawkish side are less clear."
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Ahead of next week's FOMC decision, Deutsche Bank has adopted a more dovish view on the path of Fed rates "to reflect the emergence of downside risks to the labor market": 

  • Deutsche analysts maintain their long-standing expectation of 25bp cuts at the last 3 meetings of 2024, but now see consecutive cuts extending through the March 2025 meeting for 125bp of cuts to that point, then shifting to a quarterly cut pace (Jun, Sep, Dec) for 200bp total by end-2025 to 3.25-3.50%.
  • They had for some time expected a 75bp "mid-cycle adjustment as a sufficient upfront response. We no longer view this response as adequate" on account of the "continued cooling in the US labor market" which "raises downside risks to the economy", with a "strong case for a more regular cadence of rate cuts that hastens the return of the fed funds rate to neutral". As part of their "mid-cycle adjustment view", they had previously seen rate cuts pausing at end-2024 then continuing in 2H 2025 (50bp) and 25bp in 1Q26 to 3.75-4.00%. 
  • As reflected in the new rate path, Deutsche regards neutral at around 3.5% (25bp below their previous forecast).
  • The most pronounced risk is that "the labor market weakens further in the near-term, causing the Fed to reduce rates by larger increments...Risks to the hawkish side are less clear."