Deutsche Bank "Surrenders to Powell": Will raise interest rates by 50 basis points this year, and may even raise rates early in July.

Facing stubborn inflation and the hawkish stance of the new Federal Reserve Chairman Warsh, Deutsche Bank has officially "surrendered". On June 20th, according to news from the Chase Trade Platform, Deutsche Bank has significantly raised its inflation expectations in its latest research report, completely reversing its previous monetary policy predictions: it is expected that the Federal Reserve will raise interest rates twice by 2026 (a total of 50 basis points), pushing the federal funds rate up to 4.1%, and not ruling out the possibility of an early rate hike in July. The chief US economist, Matthew Luzzetti, and his team at the bank stated in the report that this means the macroeconomic environment must be quickly repriced for "higher for longer". The loose expectations established earlier due to the Fed's "overly cautious" rate cuts will be shattered, and the fixed-income market will face a direct impact on revaluation, while interest rate-sensitive asset classes need to be wary of sharp fluctuations in the short term. The era of Warsh begins: the hawkish signal is clear Previously, Deutsche Bank had been hesitant to adjust its baseline forecast mainly due to two major uncertainties: the high economic uncertainty brought about by the Iran war and the unclear monetary policy response function of the new Federal Reserve Chairman, Warsh. However, the results of the June FOMC meeting dispelled these doubts. The Federal Open Market Committee overall showed a hawkish inclination, and the new Chairman, Warsh, set the policy direction with strong language. He clearly stated: "The Federal Reserve statement says that inflation is mainly determined by monetary policy. It is true. I have been saying for years that inflation is a choice. It is true. Today, I announce that the committee has decisively and unanimously decided, we will fulfill this promise." This statement was seen by Deutsche Bank as a strong signal that Warsh will "fix" the inflation problem, and it was a direct trigger for Deutsche Bank to shift its baseline forecast towards a hawkish stance. Meanwhile, the easing of the situation in Iran has led to a sharp drop in oil prices, and short-term and long-term inflation expectations have fallen somewhat, to some extent, eliminating the previous geopolitical uncertainties, providing a window for Deutsche Bank to update its forecasts. Baseline forecast: a rate hike in September and December, rates to rise to 4.1% Deutsche Bank pointed out that the narrative of "deflation" in the United States has been shaken, and inflationary pressures are widespread, not only limited to one-off factors such as tariffs and energy. Therefore, Deutsche Bank has significantly raised its core PCE inflation expectations for the end of 2026 and 2027 to 3.2% and 2.5% respectively. Based on inflation inertia, Deutsche Bank has updated its baseline forecast: the Federal Reserve will raise interest rates once each in September and December this year (2026), with a cumulative increase of 50 basis points, pushing the federal funds rate to 4.1%. Subsequently, the Federal Reserve will remain on hold for the entire year of 2027, until the first half of 2028 (expected in March and June), when it will lower rates by 50 basis points, slowly bringing the policy rate down to the neutral level of 3.5%-3.75%. Deutsche Bank warned that there are two-way risks in the current forecast, and on the hawkish side, the Fed's actions may be more aggressive than the baseline scenario. An early rate hike in July. Warsh has already promised to "fix" the price stability issue, and if the committee does not start tightening policy immediately, its credibility will be put to the test. Deutsche Bank believes that the committee may take action at the July FOMC meeting, rather than waiting until September. Expansion of the annual rate hike to 75 basis points. Last year's rate cuts provided the economy with a considerable degree of "insurance", and if fully reversing this loose effect, the rate hike magnitude may need to reach 75 basis points, rather than 50 basis points. Deutsche Bank also listed the potential downside (dovish) risks that could tilt the policy path towards a more dovish direction: First, improvement in energy prices and a decline in inflation expectations. After the easing of the situation in Iran, oil prices have dropped significantly, and if this effect can be sustained, it may reduce the necessity for the Fed's emergency action to some extent. Second, seasonal weakness in the labor market. During the summer, there is a historical pattern of seasonal increases in the unemployment rate, especially among young people. Deutsche Bank believes that although the Fed is currently leaning hawkish, it will not be completely indifferent to signals of weakness in the labor market. Third, gradual fading of tariff effects. Recent inflation data shows that the upward push on monthly inflation data from tariffs may be weakening, which may provide the Fed with greater operational space in responding to inflation pressures. Inflation inertia is difficult to eliminate, Deutsche Bank has long warned Deutsche Bank's policy stance shift this time is not sudden, but a logical extension of a series of previous studies. In several previous reports, Deutsche Bank's research team had gradually built up an analysis framework that "the Federal Reserve may need to raise interest rates": in "Five Questions about the US Deflation Narrative", Deutsche Bank systematically questioned the sustainability of the downward trend in inflation; in "What Keeps Inflation Sustaining above 2%? Nearly All Factors", Deutsche Bank further pointed out that inflationary pressures are widespread across all categories, not only driven by one-off factors such as tariffs or energy; in the article "Excessive Insurance?", Deutsche Bank believed that the Fed's continuous rate cuts last year were an "overly cautious" response to the downward risks in the labor market, which ultimately did not materialize. In addition, Deutsche Bank pointed out that the current policy rate is significantly lower than the levels suggested by various policy rules usually referenced by the Federal Reserve - whether based on current data, recent forecasts, the Fed's own judgment of the neutral rate (r-star), or Deutsche Bank's own estimates, the conclusions all point in the same direction: the current rate is too loose. This article was originally published on "Wall Street See", written by Dong Jing; GMTEight Editor: Yan Wencai.