The Federal Reserve’s interest rate easing cycle appears to be nearing a pause rather than a continuation, according to Deutsche Bank.
Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, predicts the central bank will halt its rate cuts following a final quarter-point reduction in December. Speaking on Bloomberg TV, Luzzetti emphasized the shifting dynamics in the Fed's outlook.
“When the Fed updates its forecasts, you’ll likely see unemployment moving lower, economic growth ticking higher, and inflation rising,” Luzzetti said. “These factors strongly support the case for an extended pause in rate adjustments.”
Economic Resilience and Persistent Inflation Drive the Fed’s Stance
Luzzetti pointed to two key factors influencing the Fed’s decision-making.
First, the U.S. economy remains resilient, reducing the immediate need for further rate cuts to stimulate growth. Ongoing consumer spending and better-than-expected labor market data signal strength, he noted.
Second, inflation remains stubbornly above the Federal Reserve's 2% target. The Consumer Price Index (CPI) rose by 2.6% in October, underscoring persistent price pressures. Investors are closely watching for additional data from the October Personal Consumption Expenditures (PCE) Index, expected on Wednesday, for further insights into inflation trends.
Trump's Policies Could Amplify Inflation Risks
Looking ahead, many on Wall Street expect inflation to climb higher under President-elect Donald Trump’s administration. Luzzetti anticipates that Trump’s policy agenda—combining tax cuts and protectionist trade measures—will elevate inflation above 2.5%.
“Tax cuts will likely boost growth and spending, while protectionist trade policies could accelerate price increases,” Luzzetti noted.
Concerns about inflation escalated after Trump announced a 10% tariff on Chinese goods and a 25% duty on imports from Mexico and Canada. Economists warn that these tariffs will likely raise costs for consumers as businesses adjust prices to account for higher import expenses.
Fed to Factor in White House Policy Shifts
Luzzetti expects the Federal Reserve to begin accounting for the potential economic impact of Trump’s policies during its December meeting. However, he believes the full implications will be reflected in decisions made in subsequent meetings.
According to Luzzetti, these policies could push the neutral interest rate—the rate that neither stimulates nor constrains the economy—closer to 4%. Currently, the Fed funds rate is in the range of 4.50%-4.75%.
Differing Views on the Fed’s Path
Not all economists share Deutsche Bank's outlook. Goldman Sachs projects that the Fed funds rate will fall to 3.25%-3.5% by the end of 2025, citing near-term economic drag from Trump’s tariffs.
Citi, meanwhile, maintains a more aggressive forecast, anticipating a 50-basis-point rate cut in December. Citi’s analysis highlights emerging signs of labor market weakness, suggesting the Fed may prioritize supporting employment in its policy decisions.
What This Means for Wealth Advisors and RIAs
For wealth advisors and RIAs, the evolving monetary policy landscape presents both challenges and opportunities. A prolonged Fed pause may signal greater stability in interest rates, which could impact asset allocation strategies and fixed-income investments.
Inflation trends also remain a critical factor. Persistent inflation or a potential rise driven by fiscal policy and trade tariffs could weigh on client portfolios, particularly in fixed-income securities with lower yields. Advisors should consider inflation-hedging strategies, such as real assets, Treasury Inflation-Protected Securities (TIPS), or equities positioned to benefit from higher price levels.
Additionally, the uncertainty surrounding Trump's policies underscores the importance of flexibility in portfolio management. Advisors may need to prepare clients for potential volatility in the bond market as the Fed assesses the longer-term implications of fiscal and trade initiatives.
Economic resilience, while a positive signal for growth-oriented investments, could also impact equity valuations if inflationary pressures lead to tighter monetary policy in the future. As always, maintaining a disciplined approach to diversification and risk management will be key to navigating these dynamics.
In a time of shifting policy and market conditions, staying informed and proactive will enable wealth advisors and RIAs to guide their clients effectively through an evolving economic environment.
