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US OUTLOOK/OPINION: Deutsche Eyes Much Higher Fed Rate Path Post-Election

US OUTLOOK/OPINION
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Deutsche Bank is eyeing a substantially higher Fed funds path post-election.  While taking care to note that these projections are "illustrative of possible upcoming forecast revisions rather than a formal change to our outlook", pending a confirmed "Red Sweep", they see likely higher growth, inflation, and neutral rates:

  • On growth, "Extension of the TCJA and additional tax-cut measures, along with a deregulation push and stronger momentum heading into the election, could lead to a meaningful upgrade to our 2025 growth forecast, which could rise to 2.5-2.75% from 2.2% currently (Q4/Q4).". And "A trade war occurs but tariffs are not implemented until H2 2025 into 2026", one result of which is that growth is slower in 2026 than currently forecast.
  • On inflation, their core PCE projection could be revised up in 2025 to 2.5% Q4/Q4 (from 2.2%), with 2026 by 0.5pp to 2.5%.
  • Due to the positive demand shock, the nominal neutral rate would rise to 3.75-4% (about 100bp above the Fed's longer-run dot). And "while December will be data dependent, we see heightened risks that the Fed skips a rate cut at that meeting."
  • They currently see end-2025 rates at 3.25-3.50% but "consistent with our prior analysis, we would anticipate the Fed keeping the Fed funds rate in a 4-4.5% range in 2025, with one additional rate cut the most likely outcome (4.375%)", though there are two-sided risks. They then see rates going to neutral (3.75-4%) over 2026 and 2027."
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Deutsche Bank is eyeing a substantially higher Fed funds path post-election.  While taking care to note that these projections are "illustrative of possible upcoming forecast revisions rather than a formal change to our outlook", pending a confirmed "Red Sweep", they see likely higher growth, inflation, and neutral rates:

  • On growth, "Extension of the TCJA and additional tax-cut measures, along with a deregulation push and stronger momentum heading into the election, could lead to a meaningful upgrade to our 2025 growth forecast, which could rise to 2.5-2.75% from 2.2% currently (Q4/Q4).". And "A trade war occurs but tariffs are not implemented until H2 2025 into 2026", one result of which is that growth is slower in 2026 than currently forecast.
  • On inflation, their core PCE projection could be revised up in 2025 to 2.5% Q4/Q4 (from 2.2%), with 2026 by 0.5pp to 2.5%.
  • Due to the positive demand shock, the nominal neutral rate would rise to 3.75-4% (about 100bp above the Fed's longer-run dot). And "while December will be data dependent, we see heightened risks that the Fed skips a rate cut at that meeting."
  • They currently see end-2025 rates at 3.25-3.50% but "consistent with our prior analysis, we would anticipate the Fed keeping the Fed funds rate in a 4-4.5% range in 2025, with one additional rate cut the most likely outcome (4.375%)", though there are two-sided risks. They then see rates going to neutral (3.75-4%) over 2026 and 2027."