Deutsche Bank adds January move to its Fed hike forecast after October CPI

A straight path of rate increases into March is more aggressive than what markets have priced in beyond December. If other institutions adopt a similar stance, it would likely trigger a repricing through the short end of the Treasury curve and lift the dollar. That scenario keeps USD/JPY under pressure toward the 160 level, where Tokyo has already issued warnings, and adds to the headwinds facing gold. For stock markets, a faster sequence of rate hikes arrives at an awkward time, with AI shares already under strain from the Nvidia leadership turmoil. Oil remains a wildcard: renewed energy-driven inflation would strengthen the argument for consecutive hikes, while a sustained drop in crude would weaken it.

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Deutsche Bank has turned UBS's "faster tightening" scenario into its baseline forecast, and the Fed debate now centres on the pace after December rather than whether a December move occurs.

• Deutsche Bank now projects quarter-point Fed rate increases in December, January and March, adding a January hike to its prior forecast of moves in December and March.
• That would bring the federal funds target range to 4.50% to 4.75%, up from the current 3.75% to 4%.
• The revision followed October CPI data, which showed a 0.4% monthly rise against a 0.3% forecast, and which the bank described as reflecting broad-based gains.
• Deutsche Bank does not rule out a 50-basis-point hike in December after comments from Waller, but it is not the bank's baseline scenario.
• UBS maintains a baseline forecast of hikes in December and March only.
• Markets price a quarter-point December move at over 95%, based on CME FedWatch.

Deutsche Bank now forecasts that the Federal Reserve will raise rates at each of its next three policy meetings, after adding a January increase to its outlook following a stronger than expected US inflation reading. The bank sees quarter-point moves in December, January and March. That would lift the fed funds target range to 4.50% to 4.75% from the current 3.75% to 4%.

Previously, Deutsche Bank had expected rate increases in December and March with a pause in January. The October consumer price report changed that assessment. Headline prices climbed 0.4% month on month versus a 0.3% consensus forecast, and the bank noted the data continued to show broad-based increases.

The bank also addressed the possibility of a larger rate move. Before the data, Fed Governor Christopher Waller suggested a 50-basis-point increase should be considered in December if price pressures accelerated, and Deutsche Bank said his remarks opened that option. It would not exclude a half-point move, but said a 50-basis-point step is not its baseline forecast.

The revision places Deutsche Bank at the more hawkish end of major banks. UBS, for example, said this week it sees limited support on the rate-setting committee for a 50-basis-point move. It retains a baseline of quarter-point hikes in December and March only, although it noted the risk of more or faster tightening. Both views share a common element: the discussion has shifted from whether the Fed hikes in December to how quickly it follows up.

Markets are close to fully pricing a December move. Traders put the probability of a quarter-point hike at the December 8-9 meeting above 95%, according to CME FedWatch.

The pace of rate rises matters well beyond bond markets. Three consecutive hikes would keep pressure on Treasury yields, which neared 5% after the CPI release, and would support the dollar. It also raises the bar for assets that have struggled with higher rates, from gold, which has fallen back below $4,000 an ounce, to highly valued technology shares. The next tests come from November's labor market data and further Fed commentary ahead of the December meeting.