Investors expecting the Federal Reserve to come through with a series of interest rate cuts over the next couple years could be left disappointed due to the unpredictable nature of what’s coming from Washington these days, according to Deutsche Bank. Though markets are pricing five or six cuts ahead, the firm’s economists say the fate of easing lies with the impact tariffs have on inflation. Should the upward push on prices be greater than anticipated, the firm sees chances of rate reductions getting smaller, with a sharp economic downturn the only catalyst for that level of easing. “History suggests that 200 [basis points] of cuts in two years has almost always required a recession,” Jim Reid, Deutsche’s global head of macro and thematic research, said in a note. The Fed cutby a full percentage point, or 100 basis points, in the latter part of 2024. Only the mid-1980s reductions, coming after former Chair Paul Volcker’s had boosted rates in a successful campaign against runaway inflation, were as aggressive absent a recession, Reid added. “That period was unique in how restrictive policy had become,” he said. “In every other case, an easing on this scale came alongside a recession — something risk markets are not currently pricing.” Current pricing in the fed funds futures market implies the benchmark overnight borrowing rate slipping to 3.93% by the end of the year, compared to the 4.33% level in place now. The Fed targets the level in quarter-point increments, with the range now set at 4.25%-4.5% , where it has been since December. The futures market level equates to a 78.5% chance of two quarter-point cuts by the end of 2025, according to CME Group data . From there, the Fed is expected to keep cutting until the funds rate bottoms at 3.07% in February 2027, according to futures prices. That would imply another two or even three cuts after this year’s moves. Deutsche is not alone in being skeptical about how quickly the Fed will be tempted to move, intense pressure from President Donald Trump’s White House notwithstanding. Bank of America doesn’t think central bank policymakers will ease at all this year as they weigh the risks of tariff-induced inflation against a slowdown in the labor market . “With the stagflationary shock possibly extending into 2026, it becomes more likely that the Fed will be frozen in place, consistent with our out-of-consensus call of no Fed cuts this year,” wrote Antonio Gabriel, a global economist at the bank.
