Deutsche Bank "surrenders to the Fed": Will raise interest rates by 50 basis points this year, and may even raise rates early in July.
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Faced with stubborn inflation and the hawkish stance of the new Federal Reserve Chair Warsh, Deutsche Bank has officially “surrendered.”
On June 20, according to Chase Wind Trading Desk, Deutsche Bank raised its inflation forecast across the board in its latest report, and completely reversed its previous monetary policy outlook: it now expects the Federal Reserve to raise rates twice in 2026 (total of 50 basis points), pushing the federal funds rate to 4.1%, and does not rule out the possibility of an early hike in July.
The team led by Matthew Luzzetti, Deutsche Bank’s Chief US Economist, stated in the report that this means a rapid repricing of the macro environment for “higher for longer” interest rates. The previous expectations of easing based on the Fed’s “over-insurance” style rate cuts will be broken, the fixed income market will face direct impact from revaluation, and rate-sensitive asset classes should beware of sharp short-term volatility.
The Warsh Era Begins: Clear Hawkish Signal
Previously, the reason Deutsche Bank had delayed adjusting its baseline forecast mainly stemmed from two uncertainties: First, the high uncertainty about the economic outlook due to the Iran war; second, the lack of clarity regarding new Fed Chair Warsh’s monetary policy response function.
However, the outcome of the June FOMC meeting dispelled these concerns. The Federal Open Market Committee showed an overall hawkish tilt, and the new Chair Warsh set a strong tone with tough words for policy direction. He made it clear:
"The Federal Reserve statement says inflation is mainly determined by monetary policy. That is indeed so. I have said for years, inflation is a choice. That is indeed so. Today I announce, this committee has unambiguously, unanimously decided, we will deliver on this promise."
Deutsche Bank sees this stance as a strong signal that Warsh will “fix” the inflation problem, and it is the direct trigger for Deutsche’s shift to a hawkish baseline forecast.
Meanwhile, easing tensions in Iran have led oil prices to fall sharply, and short- and long-term inflation expectations have retreated somewhat, which has partly eliminated previous geopolitical uncertainties and opened a window for Deutsche Bank to update its forecasts.
Baseline Forecast: Rate Hikes in September and December, Fed Funds Rate to 4.1%
Deutsche Bank highlighted the destabilization of the “disinflation” narrative in the US, with inflation pressures being widespread and not limited to one-off factors like tariffs and energy. Therefore, Deutsche Bank has sharply raised its core PCE inflation forecasts for the end of 2026 and 2027 to 3.2% and 2.5% respectively.
Based on inflation stickiness, Deutsche Bank updated its baseline forecast: The Fed will raise rates once each in September and December 2026, a total increase of 50 basis points, bringing the federal funds rate to 4.1%.
After that, the Fed will stay on hold throughout 2027, and not cut rates until the first half of 2028 (expected in March and June), gradually easing policy rates to a neutral level of 3.5%-3.75%.
Deutsche Bank warns that the current forecasts carry two-sided risk, but on the hawkish side, the Fed could act more aggressively than the baseline scenario.
1. Early rate hike in July. Warsh has publicly pledged to “fix” price stability. If the Committee does not act to tighten policy immediately, its credibility will be tested. Deutsche Bank believes the Committee may act at the July FOMC meeting, rather than waiting until September.2. Rate hikes totaling 75 basis points for the year. Last year’s rate cuts provided substantial “insurance” for the economy. If that easing effect is to be fully withdrawn, the hike might need to reach 75 basis points, not just 50.
Deutsche Bank also listed potential downside (dovish) risks that could bias policy towards easing:
First, improvement in energy prices and falling inflation expectations. Oil prices have dropped sharply after the Iran situation eased; if this effect lasts, it could reduce the need for emergency action by the Fed.
Second, seasonal weakness in the labor market. During summer, especially among young groups, there’s a historical pattern of seasonal rises in unemployment. Deutsche Bank believes that although the Fed is currently hawkish, it will not ignore signals of labor market weakness.
Third, tariff effects gradually fading. Recent inflation data shows the upward effect of tariffs on monthly inflation is weakening, which could provide the Fed more room for maneuver in addressing inflation pressures.
Sticky Inflation Hard to Fade, Deutsche Bank’s Early Warning
Deutsche Bank’s shift in policy stance is not sudden, but a logical extension of a series of previous studies.
In multiple earlier reports, Deutsche’s research team gradually built an analytical framework stating “the Fed might need to raise rates”:
In “Five Doubts about US Disinflation Narrative,” Deutsche systematically questioned the persistence of inflation declines;In “What Keeps Inflation Above 2%? Almost All Factors,” Deutsche further pointed out that inflation pressures are spread across all categories, and are not just driven by one-off factors like tariffs or energy;In “Over-Insurance?” Deutsche Bank argued that last year’s consecutive rate cuts were “over-insurance” against labor market downside risks, and these risks ultimately never materialized.
Additionally, Deutsche Bank noted that the current policy rate is clearly below levels suggested by various policy rules typically referenced by the Fed—whether based on current data, recent forecasts, the Fed’s own estimate of the neutral rate (r-star), or Deutsche's own estimates, the conclusion is the same: the current rate is too accommodative.
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