Deutsche Bank "surrenders to Walsh": Will raise rates by 50 basis points this year, and could even hike rates early in July

Faced with stubborn inflation and the hawkish stance of new Federal Reserve Chairman Warsh, Deutsche Bank has officially "surrendered."

According to Wind Chaser Trading Desk on June 20, Deutsche Bank in its latest research report has significantly raised its inflation expectations and completely reversed its previous monetary policy forecast: it now expects the Federal Reserve to raise rates twice in 2026 (a total of 50 basis points), pushing the federal funds rate up to 4.1%, and does not rule out the possibility of an early rate hike in July.

The team led by Chief US Economist Matthew Luzzetti stated in the report that this means the macro environment of "higher for longer" rates must be quickly repriced. Previous expectations of policy easing due to the Federal Reserve’s "overly cautious" rate cuts will be shattered, the fixed income market will face the direct shock of repricing, and rate-sensitive asset classes should be vigilant about severe short-term volatility.

The Warsh Era Begins: Clear Hawkish Signals

Previously, Deutsche Bank's reluctance to adjust its baseline forecasts stemmed mainly from two key uncertainties: first, the high uncertainty in economic prospects brought by the Iran war; second, the unclear monetary policy response function of the new Fed Chairman Warsh.

However, the results of the June FOMC meeting dispelled these concerns. The Federal Open Market Committee exhibited a generally hawkish tilt, and the new chairman Warsh set the policy direction with strong language. He stated clearly:

"The Fed statement says inflation is mainly determined by monetary policy. That’s true. I’ve been saying for years, inflation is a choice. That’s true. Today, I announce that this committee has unequivocally and unanimously decided—we will deliver on that commitment."

Deutsche Bank sees this statement as a strong signal that Warsh will "fix" the inflation issue, and it is the direct trigger for Deutsche Bank's hawkish turn in its baseline forecast.

At the same time, relaxation in the Iran situation has brought a sharp fall in oil prices, and both short-term and long-term inflation expectations have eased, which to some extent has eliminated previous geopolitical uncertainties and provided a window for Deutsche Bank to update its forecast.

Baseline Forecast: Rate Hikes in September and December, Rate Rises to 4.1%

Deutsche Bank points out that the US "disinflation" narrative is shaken, inflation pressures are broad-based and not limited to one-off factors such as tariffs and energy. Therefore, Deutsche Bank sharply revised its core PCE inflation forecast for the end of 2026 and 2027 to 3.2% and 2.5%, respectively.

Based on sticky inflation, Deutsche Bank updated its baseline forecast: the Fed will raise rates once each in September and December this year (2026), totaling 50 basis points, pushing the federal funds rate to 4.1%.

Thereafter, the Fed will stay on hold throughout 2027, not cutting rates until the first half of 2028 (projected for March and June) with a total cut of 50 basis points, slowly lowering the policy rate to a neutral range of 3.5%-3.75%.

Deutsche Bank warns that there's two-sided risk to the current forecast, and on the hawkish side, the Fed’s moves may be even more aggressive than the baseline scenario suggests.

• 1. Early Rate Hike in July. Warsh has publicly committed to "fixing" the price stability issue; if the committee does not start tightening policy immediately, its credibility will be tested. Deutsche Bank believes the committee could take action as soon as the July FOMC meeting, rather than waiting until September.
• 2. Total Rate Hikes for the Year Could Increase to 75 Basis Points.Last year’s rate cuts provided the economy with considerable "insurance”; to completely reverse this easing, rate hikes may need to reach 75 basis points rather than 50 basis points.

Deutsche Bank also listed downside (dovish) risks that could shift the policy path towards easing:

First, improvements in energy prices and falling inflation expectations. After the Iran situation eased, oil prices fell sharply; if this effect persists, it may to some extent reduce the need for urgent Fed action.

Second, seasonal weakening of the labor market.During the summer, there is a historical pattern of rising unemployment rates, especially among younger groups. Deutsche Bank believes that although the Fed is currently hawkish, it won’t be completely unresponsive to signs of labor market weakness.

Third, gradual fading of tariff effects. Recent inflation data shows that the upward impact of tariffs on monthly inflation may be weakening, which may give the Fed more room for maneuver in addressing inflation pressures.

Persistent Inflation: Deutsche Bank’s Early Warnings

This shift in Deutsche Bank's policy stance is not sudden, but a logical extension of a series of previous research.

In a number of previously published reports, Deutsche Bank's research team had already constructed an analytical framework suggesting "the Fed might need to raise rates":

• In "Five Questions About the US Disinflation Narrative," Deutsche Bank systematically questioned the sustainability of declining inflation;
• In "What Keeps Inflation Above 2%? Almost Everything," Deutsche Bank further pointed out that inflation pressures are broadly spread across categories and not just driven by one-off factors like tariffs or energy;
• In "Over-Insurance?" Deutsche Bank argued that last year’s consecutive rate cuts by the Fed were an "over-insurance" response to labor market downside risk, which ultimately did not materialize.

Additionally, Deutsche Bank points out that the current policy rate is significantly lower than levels suggested by various policy rules commonly referenced by the Fed—regardless of current data, recent forecasts, the Fed’s own view of the neutral rate (r-star), or Deutsche Bank’s estimates, all point in the same direction: the current rate is too accommodative.