The Federal Reserve’s Dovish Pivot May Not Be as Likely as Markets Believe, According to Deutsche Bank
Recently released inflation data has convinced the markets that the Federal Reserve is likely to take a more dovish approach. However, Deutsche Bank pointed out that the market has incorrectly anticipated a looser stance by the Fed at least six times in the past few years.
The stock market has experienced significant growth over the last month, driven by the hope of a dovish pivot from the Federal Reserve. But investors have been down this road before.
According to Deutsche Bank, the market has misjudged the possibility of a dovish pivot six times in the past two years. The S&P 500 has surged by 9% since late October, fueled by signs of weaker job growth and lower-than-expected inflation. This has led many on Wall Street to believe that the Fed’s tightening cycle is coming to an end and that there may even be a rate cut as soon as March, as indicated by fed funds futures.
Deutsche Bank has outlined the previous occasions when the market misjudged the Fed’s stance and warned about the possibility of doing so again this time. These occurrences include the Omicron scare in November 2021, the Ukraine war in the spring of 2022, various global risks in May 2022, expectations of a global recession in July 2022, the UK budget fiasco in the fall of 2022, and the banking chaos in March 2023.
Although the current confidence in imminent Fed cuts could prove accurate, Deutsche Bank emphasized that bringing inflation to the 2% target rate is a challenging final stretch. Additionally, when inflation peaks, it is often driven by temporary factors, making it difficult to accurately assess the situation in real time.
Given the history of the market’s misjudgments, Deutsche Bank advised considering whether the conditions for a dovish pivot are actually in place and cautioned against assuming that the Fed will take a more accommodative stance for the seventh time.
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