Deutsche Bank's latest research report shows that market expectations for the Federal Reserve next year have significantly changed, anticipating that the new chairman may drive continued easing.
On June 26, according to Chasing Wind Trading Desk, Deutsche Bank's latest research report stated that financial markets' policy expectations for the Federal Reserve next year have significantly changed, with particularly aggressive expectations for rate cuts after the new Fed chairman takes office.
The current Fed chairman's term will expire in May next year. However, according to a Wall Street Whispers article, Trump is considering announcing the next Fed chairman as early as this summer, well ahead of the traditional 3-4 month transition period. Informed sources revealed that Trump hopes to influence market expectations and monetary policy direction by announcing the successor early, allowing a "shadow chairman" to impact the market before Powell's term ends.
The report also noted that since last week's dovish speeches by Fed governors like Waller, the market has priced in additional rate cuts of about 10 basis points before the end of the year.
Statistical Model Reveals Unusual Pricing Next Year: "New Chairman Premium" Emerges
Deutsche Bank said the truly notable change occurred in expectations for rate cuts in the middle of next year.
The report stated that the market increasingly expects monetary policy to remain loose once the new Fed chairman takes office. The current chairman Powell's term will expire in May next year, making this timeframe a market focus.
Deutsche Bank discovered an intriguing phenomenon through a regression model: by regressing rate cut pricing for the second, third, and fourth quarters of next year against the first quarter, and analyzing residuals to measure forward rate cut expectations relative to the first quarter's "abnormality".
Deutsche Bank found that these residuals significantly turned negative over the past month, especially in the third quarter of 2026 - precisely when the new chairman will be in office. This indicates the market is pricing in an unusually loose policy during the new chairman's term, a pricing pattern that deviates from recent historical norms.
Note: Residuals refer to the difference between actual observed values and estimated values (fitted values). "Residuals" contain important information about the model's basic assumptions. If the regression model is correct, residuals can be viewed as observations of errors.
However, the report also cautioned a conservative approach to this "new chairman premium". This is because monetary policy requires support from a majority of FOMC committee members, and the new Fed chairman would need to convince colleagues to support a different policy trajectory. This institutional constraint suggests that policy pricing discontinuity around the new chairman should be minimal.
Notably, despite these differences, market expectations for rate cuts in the second, third, and fourth quarters of 2026 remain less than the first quarter, suggesting the market does not expect a dramatic policy shift but believes loose policies will continue longer under the new chairman.
Recent Market Pricing Changes: Dovish Remarks Drive Rate Cut Expectations
A previous Wall Street Whispers article noted that on Monday (June 23), Fed Governor Bowman stated that she would support rate cuts as early as July if inflation pressure remains controlled.
Bowman's reasoning is that labor market risks might increase, and inflation appears to be steadily moving towards the Fed's 2% target. Last Friday, Fed Governor Waller told CNBC he might support next month's rate cut due to concerns about an overly weak labor market.
Deutsche Bank's report pointed out that since last Thursday, the market has additionally priced in about 10 basis points of Fed rate cuts before year-end, mainly influenced by the dovish remarks from Fed governors Waller and Bowman. This change reflects investors' immediate response to the Fed's softening policy stance.
According to the latest FedWatch data, the probability of the Fed cutting rates in July is 20.7%, higher than a week ago (12.5%), and traders have now fully factored in rate cut expectations for the September meeting.
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