New Chairman, Big Easing? The market's expectations for the Federal Reserve next year are very aggressive

Deutsche Bank's latest research report shows that market expectations for the Federal Reserve next year have changed significantly, with the new chairman likely to promote continued easing.

On June 26, according to news from the Wind Trading Desk, Deutsche Bank stated in its latest report that financial market expectations for the Federal Reserve's policies next year have changed significantly, particularly regarding the aggressive expectations for interest rate cuts following the appointment of the new Federal Reserve chairman.

The current chairman's term will expire in May next year; however, according to an article from Wall Street Insight, Trump is considering announcing the next Federal Reserve chairman as early as this summer, far earlier than the traditional 3-4 month transition period. Insiders revealed that Trump hopes to influence market expectations and monetary policy direction by announcing the successor in advance, allowing the "shadow chairman" to start making an impact before Powell's term ends.

The report also noted that since last week, when Federal Reserve Governor Waller and other officials made dovish remarks, the market has priced in an additional approximately 10 basis points of interest rate cuts before the end of the year.

Statistical Model Reveals Anomalous Pricing for Next Year: "New Chairman Premium" Emerges

Deutsche Bank stated that the truly striking change occurred in expectations for interest rate cuts in the middle of next year.

The report indicated that the market seems to increasingly expect that once the new Federal Reserve chairman takes office, monetary policy will continue to be accommodative. The expiration of the current chairman Powell's term in May next year has become a focal point for the market.

Deutsche Bank discovered an intriguing phenomenon through regression modeling: pricing for interest rate cuts in the second, third, and fourth quarters of next year regressed against the first quarter, measuring the "anomalous" degree of forward interest 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, particularly in the third quarter of 2026—during the new chairman's tenure. This indicates that the market is pricing in an anomalous degree of accommodative policy during the new chairman's term, a pricing pattern that deviates from historical norms in recent years.

Note: Residuals refer to the difference between actual observed values and estimated (fitted) values. "Residuals" contain important information about the fundamental assumptions of the model. If the regression model is correct, residuals can be viewed as observed values of errors.

However, the report also cautioned against being overly optimistic about this "new chairman premium." This is because formulating monetary policy requires the support of a majority vote from the FOMC, and the new Federal Reserve chairman will need to persuade colleagues to support a different policy trajectory. This institutional constraint implies that the discontinuity in policy pricing surrounding the new chairman should be slight.

It is noteworthy that even with the aforementioned differences, the market's expectations for interest rate cuts in the second, third, and fourth quarters of 2026 are still lower than in the first quarter, indicating that the market does not expect a sharp policy shift but rather believes that the accommodative policy under the new chairman will last longer

Recent Market Pricing Changes: Dovish Remarks Boost Rate Cut Expectations

An earlier article from Wall Street Journal pointed out that on Monday (June 23), Federal Reserve Governor Bowman stated that if inflation pressures remain controlled, he would support a rate cut as early as July when discussing the economy and monetary policy.

Bowman's reasoning is that the risks in the labor market may be rising, while inflation seems to be stabilizing towards the Federal Reserve's 2% target. Last Friday, Federal Reserve Governor Waller mentioned in an interview with CNBC that he might support a rate cut next month due to concerns about a weak labor market.

Deutsche Bank noted in a report that since last Thursday, the market has priced in an additional 10 basis points for a Federal Reserve rate cut by the end of the year, primarily influenced by the dovish remarks from Federal Reserve Governors Waller and Bowman. This change reflects investors' immediate reaction to a softening of the Federal Reserve's policy stance.

According to the latest data from FedWatch, the market is betting on a 20.7% probability of a Federal Reserve rate cut in July, an increase from a week ago (12.5%), and traders have fully priced in expectations for a rate cut at the September meeting