Original Article Title: "New Chairman, More Easing? Market's Expectation for Next Year's Fed Is Very Aggressive"

Original Article Author: Dong Jing, Wall Street View

A recent research report by Deutsche Bank shows a significant shift in the market's expectations for the Fed next year, with the new chairman expected to advocate for continued easing.

On June 26, according to Wind Trading Floor, Deutsche Bank stated in its latest research report that the financial markets have seen a notable change in policy expectations for the Fed next year, especially with exceptionally aggressive rate-cut expectations following the appointment of the new Fed chairman.

The current Fed chairman's term is set to end in May next year; however, as indicated by a Wall Street View article, Trump is considering announcing the next Fed chair's appointment as early as this summer, well ahead of the traditional 3-4 month transition period. Sources revealed that Trump hopes to use an early announcement to have the 'shadow chair' start influencing market expectations and monetary policy direction before Powell's term ends.

The report also stated that since last week's dovish speeches by Fed Governor Waller and other officials, the market has priced in an additional 10 basis points rate cut by the end of the year.

Statistical Model Reveals Unusual Pricing for Next Year: Emergence of "New Chairman Premium" Phenomenon

Deutsche Bank stated that the most striking change has occurred in the expectations for a mid-year rate cut next year.

The report mentioned that the market seems increasingly expectant that once the new Fed chairman takes office, monetary policy will continue its accommodative stance. With Chairman Powell's term ending in May next year, this timing has become a focal point for the market.

Deutsche Bank identified a remarkable phenomenon through a regression model: pricing of rate cuts in the second, third, and fourth quarters of next year regressed against the first quarter, measuring the "abnormal" degree of forward rate-cut expectations relative to the first quarter through residual analysis.

Deutsche Bank found that over the past month, these residuals have significantly turned negative, especially in the third quarter of 2026—coinciding with the new chairman's tenure. This indicates that the market is pricing in an unusually accommodative policy stance during the new chairman's term, a pricing pattern deviating from historical norms in recent years.

Nota: Residuals refer to the difference between actual observed values and estimated (fitted) values. Residuals contain important information regarding the model's underlying assumptions. If the regression model is correct, residuals can be seen as error observations.

However, the report also notes caution regarding this "new chairman premium." Since setting monetary policy requires the support of a majority of FOMC voters, the new Fed chairman would need to persuade colleagues to support a different policy trajectory. This institutional constraint implies that any discontinuity in policy pricing around the new chairman should be minimal.

It is worth noting that, despite the aforementioned divergences, the market's expectation of rate cuts in the second, third, and fourth quarters of 2026 is still lower than that of the first quarter. This indicates that the market is not anticipating a sharp policy shift but rather believes that the accommodative policy under the new chair will continue for a longer period.

Recent Market Pricing Changes: Dovish Comments Drive Rate Cut Expectations

As previously highlighted in a Wall Street News article, on Monday, June 23, Federal Reserve Board Governor Bauman, when discussing the economy and monetary policy, stated that if inflation pressures remain contained, he would support an interest rate cut as early as July.

Bauman's rationale was that risks in the labor market may be rising, while inflation appears to be steadily moving towards the Fed's 2% target. Last Friday, Federal Reserve Board Governor Waller, in an interview with CNBC, mentioned that he might support a rate cut next month due to concerns about a too-soft labor market.

Deutsche Bank noted in a report that since last Thursday, the market has priced in an additional 10 basis points of Federal Reserve rate cuts by the end of the year, mainly influenced by dovish comments from Federal Reserve Governors Waller and Bauman. This shift reflects investors' immediate response to a softening of the Fed's policy stance.

According to the latest FedWatch data, the market is betting a 20.7% probability on a rate cut by the Fed in July, up from 12.5% a week ago. Currently, traders have fully priced in rate cut expectations at the September meeting.

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