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US OUTLOOK/OPINION: Deutsche No Longer Sees 2025 Fed Cuts

US OUTLOOK/OPINION
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Deutsche analysts have revised up their baseline for the Fed rate path in light of recent data and potential shifts in policy under the incoming Trump administration:

  • After a 25bp cut in December (which is a "close call"), they see an "extended pause" through 2025, with cuts thereafter bringing the policy rate range down to what Deutsche characterizes as neutral at 3.75-4.00%. Previously, their base case was for a December rate cut and 100bp in 2025 to end next year at 3.25-3.50%.
  • "With an extended pause, it is plausible that two-sided risks to the Fed outlook reemerge next year (i.e., at some point they remove a cutting bias), particularly if inflation proves stickier prior to the tariffs and the labor market shows signs of reaccelerating."
  • Previously they'd seen core PCE at end 2025 at 2.2% / 2026 at 2.0% - that's now 2.6% and 2.7%, respectively ("driven by tariffs"). And they now see the unemployment rate dipping to 3.9% in 2025.
  • Their rationale: "The Republican sweep in the 2024 election promises to bring transformative changes to the economic landscape across policies related to regulation, trade, immigration and tax and spending....Stronger momentum heading into 2025 combined with modest tax cuts, a deregulation push, and more supportive financial conditions should produce faster growth next year, which we now see at 2.5% (Q4/Q4) versus 2.2% previously. Beyond next year, adverse effects from higher tariffs and retaliatory trade restrictions abroad, as well as more restrictive monetary policy, reduce our growth estimates modestly. With productivity growth staying elevated, we see a case for potential growth in the mid-2% range."
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Deutsche analysts have revised up their baseline for the Fed rate path in light of recent data and potential shifts in policy under the incoming Trump administration:

  • After a 25bp cut in December (which is a "close call"), they see an "extended pause" through 2025, with cuts thereafter bringing the policy rate range down to what Deutsche characterizes as neutral at 3.75-4.00%. Previously, their base case was for a December rate cut and 100bp in 2025 to end next year at 3.25-3.50%.
  • "With an extended pause, it is plausible that two-sided risks to the Fed outlook reemerge next year (i.e., at some point they remove a cutting bias), particularly if inflation proves stickier prior to the tariffs and the labor market shows signs of reaccelerating."
  • Previously they'd seen core PCE at end 2025 at 2.2% / 2026 at 2.0% - that's now 2.6% and 2.7%, respectively ("driven by tariffs"). And they now see the unemployment rate dipping to 3.9% in 2025.
  • Their rationale: "The Republican sweep in the 2024 election promises to bring transformative changes to the economic landscape across policies related to regulation, trade, immigration and tax and spending....Stronger momentum heading into 2025 combined with modest tax cuts, a deregulation push, and more supportive financial conditions should produce faster growth next year, which we now see at 2.5% (Q4/Q4) versus 2.2% previously. Beyond next year, adverse effects from higher tariffs and retaliatory trade restrictions abroad, as well as more restrictive monetary policy, reduce our growth estimates modestly. With productivity growth staying elevated, we see a case for potential growth in the mid-2% range."