Deutsche Bank on Powell’s “breaking out the punchbowl early”

Deutsche Bank response to the FOMC/Dots/Powell presser on Wednesday is a note titled: “December FOMC: Powell breaks out punchbowl early at the holiday party.”

Says the new developments don’t impact their base case for rate cuts next year:

  • Powell’s dovish tone Wednesday increases the probability of rate cuts coming sooner than some anticipate
  • and boosts the chance of a soft landing if inflation continues to ease

“Our baseline remains that the first rate cut is likely to come in June 2024 and that the Fed will reduce rates by 175bps next year

  • the “meeting points to dovish risks to this expectation”
  • “We see heightened risks that rate cuts could come as early as March”
  • “Earlier policy easing in the presence of more substantial disinflation would improve soft landing prospects.”


As a ps, in a separate note an analyst at DB warns of the potential of a harder landing than many are expecting because of the lagged impact of policy tightening:

current conditions are as sanguine as they could be, but with history suggesting it’s still early in terms of the lag of monetary policy.

In our 2024 outlook, we predicted 175bps of cuts for next year but that was predicated on a mild recession. The Fed and the market are catching up, but overwhelmingly for soft landing reasons.

So at the moment we are right on that front but for the wrong reasons according to the market.

There is decent evidence that the VIX lags Fed Funds by around two years.
So is the most aggressive hiking cycle for 40 years about to bite in the same way, and with similar timing as most hiking cycles eventually do, or “is this time different?” Are the Fed pivoting just in time to ensure the lag never fully happens and we achieve the soft landing?

2024 is shaping up as a wild, wild year.

This article was written by Eamonn Sheridan at Source