Deutsche Bank has raised its expectations for the US terminal interest rate, warning the bank's "base case" predicts a recession over a soft landing.
Following inflation numbers released yesterday (14 February), DB predicted the Federal Reserve would raise rates to 5.6%, up from a previous forecast of 5.1%.
This would likely occur through two more hikes than it had previously forecast, across 25 basis point hikes in the Federal Open Market Committee June and July meetings, the bank said.
Yesterday (14 February), the Department for Labor Statistics revealed that inflation sat at 6.4% in January, above expectations of 6.2%.
DB analysts wrote in a note: "Yesterday was the straw that broke the camel's back as the risks have been on the upside for a while."
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Since the FOMC's February meeting earlier this month, DB analysts said there had been three "key lessons" learned: a "remarkably resilient" labour market, high inflation numbers and a lack of tightening in financial conditions.
However, it did note the strength of the economy suggested the likely recession could be pushed to the end of 2023, leading the first rate cut from the Fed to occur in early 2024.
The DB forecast is more hawkish than many others, with the market forecast suggesting that rates will peak at an average of 5.27%. DB noted that this was up 7.3bps to the day before, and much higher than the market view of a 4.8% peak two weeks ago.
December 2023's rate prediction had risen even further, rising 14.9bps in one day to 5.07%, up from 4.3% at the start of this month.
The analysts concluded: "Whichever way you want to cut it, it is clear that the jobs report and the latest CPI print have painted a much more robust picture for the US economy than the consensus expected at the start of the year."
