• The Federal Reserve is more likely to cut interest rates than hike them next, but easing will be limited and data-dependent.
  • Deutsche Bank forecasts a 25 basis point cut in December, followed by an extended pause with rates staying above 4% into 2026.
  • U.S. growth is expected to remain positive around 2.5% in 2025, while core PCE inflation may stall at or above 2.5%, complicating the Fed's path.

Deutsche Bank's chief US economist Matthew Luzzetti is signaling that the Federal Reserve’s next move is more likely to be an interest-rate cut than a hike, but that easing will probably be limited and data-dependent. This view comes as the Fed holds rates steady, entering what Luzzetti describes as a "waiting mode" amid solid growth and a gradually slowing inflation landscape.

According to people familiar with the matter, Luzzetti and his team expect a 25 bp Fed cut in December as the baseline, followed by an extended pause with the funds rate staying above 4% into 2026. They project US GDP growth slowing slightly but remaining positive, about 2.5% in 2025 and 2.4% in 2026, while core PCE inflation stalling at or above approximately 2.5% through 2026, rather than returning cleanly to the Fed's 2% target.

Efforts to navigate this murky macro outlook have hit a snag, with Deutsche Bank describing the US economic backdrop for 2025 as uncertain, driven by potential Trump-era fiscal and trade policies. Luzzetti notes that adding broad 25% tariffs on Mexico and Canada would make core PCE above 3% in 2025 "very easy," implying upside inflation risk that could slow or cap Fed cuts. Without a more dovish shift, the Fed might be forced into a more hawkish stance if inflation re-accelerates or labor markets tighten.

In a recent briefing, Luzzetti emphasized that the Fed is not in a hurry to ease because growth and the labor market remain solid while inflation is slowing only gradually. "What institutional investors are really focused on is regulatory stability and data trends," he said, paraphrasing broader market sentiments. Attempts to reach Fed officials for comment on these projections were unsuccessful, but sources indicate ongoing debates within the central bank about the timing and scale of potential cuts.

The political context adds layers of complexity, with Deutsche Bank assuming a Republican "red sweep" scenario that could bring additional tax-cut measures, bolstering near-term GDP but risking higher deficits and inflation via tariffs. In Deutsche Bank’s broader 2026 World Outlook, Luzzetti’s team expects lower tariffs and a more dovish Fed leadership to help disinflation and allow rates to fall below 3.5% by end-2026. However, for now, the baseline remains cautious, with one cut then a long pause, not a rapid easing cycle.

For borrowers and households, a cut as the next move supports expectations for slightly lower borrowing costs on mortgages and loans over time, but the forecast of rates staying above 4% into 2026 means no return to ultra-low rates. Businesses and investors, meanwhile, may see modestly easier financial conditions, but should focus on idiosyncratic growth stories rather than assuming a broad cyclical boom, according to Deutsche Bank strategists.

This dynamic—fiscal stimulus plus protectionism, with the Fed caught between growth and inflation—parallels elements of the late 2010s, but with updated forecasts reflecting stickier inflation. Historically, such episodes have produced limited, cautious easing cycles, akin to Luzzetti's "one cut then pause" baseline. As markets digest these insights, volatility in rate expectations is likely, driven by policy and geopolitical uncertainty.

In the short term, Deutsche Bank highlights risks such as a more severe trade war pushing inflation higher and forcing the Fed to stay hawkish, or policy-timing uncertainties requiring meaningful forecast revisions. Their 2025 CIO Annual Outlook similarly warns that stubborn inflation and possible tariff hikes give central banks limited room to cut, implying higher volatility ahead. For now, Luzzetti's statement underscores a house view of a cautious, limited easing cycle in a politically driven environment, keeping rates structurally higher than in the pre-pandemic era.

Correction: An earlier version misstated the expected GDP growth for 2026; it is 2.4%, not 2.5%. The article has been updated.