Deutsche Bank strategists report that following a hawkish Federal Open Market Committee (FOMC) meeting under the new Chair Kevin Warsh, they now forecast two 25 basis point Federal Reserve rate hikes in 2026, likely occurring in September and December. This would bring the fed funds rate to approximately 4.1% [1]. The strategists also anticipate a prolonged pause in rate changes through 2027 after these hikes [1].
The market responded to the FOMC's stance with a notable repricing: by the end of the week, 39 basis points of Fed hikes were priced in by December, compared to 21 basis points at the start of the week. This was accompanied by a flattening of the Treasury curve as short-end yields rose [1].
The FOMC's dot plot revealed that 9 out of 18 officials signaled support for a rate hike this year, although Chair Kevin Warsh did not submit a dot himself [1]. Despite a decline in inflation expectations, the Fed's decision on Wednesday was interpreted as clearly hawkish, prompting the market's reaction [1].
Deutsche Bank's central scenario underscores the expectation of two rate increases this year, followed by a prolonged pause, reflecting the Fed's shift in policy direction under new leadership [1].
CONCLUSION
Deutsche Bank's updated forecast, following a hawkish FOMC under Chair Warsh, points to two rate hikes in 2026 and a subsequent pause. Markets have already repriced to reflect this outlook, indicating significant impact and heightened expectations for tighter monetary policy.