Deutsche Bank-Fed Notes The next (and final) frontier Mapping conditions for cuts and hikes-此为英文文档

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FedNotes

Thenext(andfinal?)frontier:Mappingconditionsforcutsandhikes

nAttheMayFOMCmeeting,ChairPowellditchedcalendar-basedguidanceandembraceddatadependence(see"Holdtheline,cutsaren'talwaysontime").Indoingso,hedetailedtheFed’sbroadreactionfunctiontovariouseconomicoutcomes.Inthispiece,weconductascenarioanalysisaroundconditionsforcuttingandhikingratesbasedonaratecutfrontierwefirstpublishedinourrecentmonthlychartbook(seeslide43here:"Thewaitingisthehardestpart").

nOuranalysisidentifiesconditionsfortheunemploymentrateandinflationthatwouldbeconsistentwithratecutsandhikesthisyeardependingoniftheFedisactinginertiallyornon-inertially.Takentogether,theframeworkisconsistentwithcurrentsignalsfromtheFed,namely:ratesarelikelyatthepeak;thenextmoveismorelikelytobearatecutthanarateincrease;butthatfurtherprogressoninflationisneededtogainconfidenceindisinflationandtriggerareduction.

Date

8May2024

MatthewLuzzetti,Ph.D.

ChiefUSEconomist

+1-212-250-6161

BrettRyan

SeniorUSEconomist

+1-212-250-6294

JustinWeidner

Economist

+1-212-469-1679

AmyYang

Economist

+1-212-454-9893

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IMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.MCI(P)041/10/2023.UNTIL19thMARCH2021INCOMPLETEDISCLOSUREINFORMATIONMAYHAVEBEENDISPLAYED,PLEASESEEAPPENDIX1FORFURTHERDETAILS.

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FedNotes

Figure1:Fedhikeandcutfrontiers

Source:DeutscheBank.Note:Green(red)shadedareawouldcorrespondtodatacombinationswhichwouldentailratecuts(hikes)underthenon-

inertialrulebutleavingratessteadyundertheinertialrule.TheTaylorruleisusedtoderivetheseconditions.

Interpretingtheseresultsthustakesadditionalconsideration.TheFedisconcerned

aboutupsideinflationriskswhichcouldseeprogressstallorevenreverse.Forthis

reason,theyareactinginertiallytoensuredisinflationisontrack.Byextension,the

cutsignalfromthenon-inertialruleistoodovish.Nonetheless,wealsobelievethe

signalfromtheinertialrule(nocutuntil2.3%corePCEwithunemploymentaround

NAIRU)istoohawkish.Therealityislikelyinbetween.Year-over-yearcorePCE

inflationneedstosustainablyfallfromcurrentlevels,coupledwithevidenceof

moredisinflationovershortertimehorizonsfortheFedtoactivelyconsidercutting

rates.

ThefrontieralsohelpsinformhowtheFedshouldreacttochangesin

unemploymentwhilekeepinginflationunchanged.HerewefindthatwithcorePCE

arounditscurrentlevelof2.8%yoy,itwouldnottakemuchofadeteriorationinthe

unemploymentratetojustifyaratecut,especiallygiventheFed'sasymmetricview

aboutitslabormandate(i.e.,theyonlyrespondtoshortfallsofmaximum

employment).Inthisdirection,wealsobelievetheFedismorelikelytoactnon-

inertially.Deteriorationsinthelabormarketareusuallynon-linear,asevidencedby

theSahmrule.Wethereforebelieveonlyamodestweakeninginthelabormarket

(e.g.,theunemploymentraterisingto~4.2%duetosofterunderlyingconditions)

wouldbeneededfortheFedtocutwithanunchangedinflationprofile.

Forratehikes,weviewthenon-inertialprescriptionsasmoreplausible.Thisrule

suggestsa3.3%corePCEinflationratewouldbeconsistentwithahike,whilethe

inertialrulesuggeststheFedshouldtolerateinflationacceleratingto3.9%.TheFed

wouldclearlyactbeforethelatterisreached.Clearevidenceofanaccelerationin

pricesfromcurrentlevelswouldrequiretheFedtobegintothinkaboutandpossibly

eventuallyenactaratehike.A50bpriseininflationwouldlikelybesufficient–atthat

leveltheFedcouldnolongersimplycommittokeepingratessteadyforlonger.Such

aresponsecouldbeacceleratedifinflationexpectationsbegantostirupward.

Ifthedataevolvedinsuchawaytoeventuallynecessitateratehikes,theFedwould

firstdropitseasingbiasandthensignalanunchangedpolicyviathedotplot.Ifthat

responsedidnotsufficientlytightenfinancialconditionsandthedatacontinuedto

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FedNotes

deteriorate,aratehikecouldbecomenecessary.AtthatstagetheFedwouldlikely

becontemplatingapathtowardsmultipleincreases–asingle25bphikecouldbe

immaterialfromamacroperspective.Whetherornottheyenactedmultiplehikes

inthisscenariowoulddependontheevolutionoffinancialconditionsandfinancial

stabilityrisks.

Takentogether,ourratecut/hikefrontierisconsistentwithcurrentsignalsfromthe

Fed,namely:ratesarelikelyatthepeak;thenextmoveismorelikelytobearatecut

thanarateincrease;butthatfurtherprogressoninflationisneededtogain

confidenceindisinflationandtriggerareduction.

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FedNotes

Appendix1

ImportantDisclosures

*Otherinformationavailableuponrequest

*PricesarecurrentasoftheendoftheprevioustradingsessionunlessotherwiseindicatedandaresourcedfromlocalexchangesviaReuters,Bloombergandothervendors.OtherinformationissourcedfromDeutscheBank,subjectcompanies,andothersources.ForfurtherinformationregardingdisclosuresrelevanttoDeutscheBankResearch,pleasevisitourglobaldisclosurelook-uppageonourwebsiteat

/Research/Disclosures/FICCDisclosures

.Asidefromwithinthisreport,importantriskandconflictdisclosurescanalsobefoundat

/Research/Disclosures/

Disclaimer.Investorsarestronglyencouragedtoreviewthisinformationbeforeinvesting.

AnalystCertification

Theviewsexpressedinthisreportaccuratelyreflectthepersonalviewsoftheundersignedleadanalyst(s).Inaddition,theundersignedleadanalyst(s)hasnotandwillnotreceiveanycompensationforprovidingaspecificrecommendationorviewinthisreport.MatthewLuzzetti,BrettRyan,JustinWeidner,AmyYang.

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