JFrog stock rises as Cantor Fitzgerald maintains Overweight rating after strong Q2
Investing.com -- Deutsche Bank expects the Federal Reserve to hold interest rates steady until December, citing a higher estimate for the natural rate of unemployment and lingering inflation concerns.
"The anticipated adverse tariff supply shock is expected to create tension between the Fed’s dual-mandate objectives of stable prices and maximum sustainable employment," Deutsche Bank (ETR:DBKGn) analysts wrote in a note titled US Economic Perspectives.
According to the bank’s updated analysis of labor market slack indicators, the distribution of alternative estimates for u-star is “centered on 4.6%,” which is above the Fed’s most recent median estimate of 4.2%.
A higher natural rate implies that the Fed “should accept some weakening in the labor market before needing to cut rates,” particularly while inflation remains elevated, says the bank.
Deutsche Bank reiterated its base case that “the first cut will come only at the December meeting.”
However, it added a caveat: “The speed of the deterioration matters given the labor market’s non-linear dynamics (e.g., the Sahm rule). A faster-than-expected deterioration would likely warrant a faster dovish pivot.”
The note also referenced Fed Chair Jerome Powell’s May comments, underscoring that when inflation and employment goals conflict, “the Fed considers the distance from targets and the time horizons over which those gaps are likely to persist when determining which side needs more attention.”
Deutsche Bank’s updated u-star model, which incorporates a range of labor market variables rescaled to match historical norms, suggests labor market conditions have largely normalized since the pandemic, further justifying the Fed’s cautious stance on rate cuts.