Fed set to deliver two more cuts this year but data risks loom, Deutsche Bank analysts say

Deutsche Bank projects the Federal Reserve will execute two more 25 basis point rate cuts in October and December 2025, targeting a fed funds range of 3.5%-3.75% by year-end, provided labor and inflation data do not surprise to the upside. This outlook follows the September 25bp cut, which Chair Powell framed as a "risk management" move driven by rising employment risks, despite a somewhat hawkish tone that contrasts with the dovish median dot plot and a divided FOMC. The Fed's path remains highly data-dependent, requiring close monitoring of upcoming economic indicators.

Analysis

Deutsche Bank analysts maintain their baseline expectation for the Federal Reserve to implement two additional 25 basis point rate cuts in 2025, one at each of the October and December meetings, which would position the fed funds rate in a 3.5% to 3.75% range by year-end. This forecast is critically dependent on labor market and inflation data not surprising to the upside, as stronger data could prompt the Fed to pause its easing cycle. The recent 25bp cut in September was framed by Chair Jerome Powell as a "risk management cut" to mitigate "downside risks to employment," rather than a fundamental shift in the economic outlook. However, the Federal Open Market Committee remains visibly divided; the median dot plot for 2025 showed a narrow majority favoring three or more cuts, with nine participants foreseeing two or fewer, and out-year forecasts diverge by as much as 150bps. This internal dissension, which included a dissent from Governor Miran in favor of a larger 50bp cut, is compounded by what Deutsche Bank perceives as a "somewhat hawkish" tone from Chair Powell, which contrasts with the dovish dot plot and underscores that the Fed's path is not predetermined and remains highly data-dependent.

Key Decisions for Investors

• Investors should prioritize monitoring upcoming labor market and inflation reports, as upside surprises represent the primary risk to the baseline forecast of two additional rate cuts this year.
• Given the noted division within the FOMC and the divergence between the dot plot's signal and Chair Powell's tone, expect heightened volatility in fixed income and equity markets around future data releases and policy announcements.
• Consider maintaining exposure to rate-sensitive assets in line with the expected easing trajectory, but it may be prudent to hedge against a potential policy pause should economic indicators print stronger than anticipated.