Deutsche Bank analysts expect the Federal Reserve to shift toward a more aggressive monetary policy due to persistent inflation. The bank forecasts a total of 75 basis points of tightening over the next seven months, starting with a 25 basis point hike at the September 2026 meeting and another in December.
The bank's outlook follows August economic data, which showed core CPI rising 0.29% month-over-month, exceeding market expectations. Strategist Henry Allen noted a disconnect between market forecasts and the reality of services inflation, while Fed Chair Kevin Warsh reaffirmed the 2% inflation target.
Energy prices and tariffs are identified as primary drivers keeping inflation elevated. As of mid-September 2026, market participants have priced in an 87% to 94% probability of a near-term rate hike, reflecting a significant shift in expectations compared to earlier in the month.
Analysts at Deutsche Bank, including Jim Reid, argue that the period of central bank patience has ended. A tightening cycle would increase borrowing costs, impacting sectors like real estate and consumer discretionary stocks, while potentially benefiting financial institutions.
