What if the next Fed move was up?

Investing.com -- The S&P 500’s has racked up massive gains in 2025, ridding a powerful tailwind from Fed rate cuts, but Deutsche Bank warns that support may prove fragile as traditional policy rules and a looming fiscal jolt from Trump’s “Big Beautiful Bill” leave little room for further monetary policy easing and raise the risk that the next move in rates is up, not down.

A 2026 rate hike is a “negative curveball” that shouldn’t be ruled out, Deutsche Bank analysts warned, especially after one of the fastest cutting episodes outside a recession in decades.

"Many of the big multi-asset selloffs of recent years (2015-16, 2018, and 2022) have coincided with Fed rate hikes,” the analysts said.

While the Fed is still cutting for now and expected to deliver another 25-basis-point cut at its meeting on Wednesday, standard policy rules already put rates toward the lower end of the appropriate range given that inflation is forecast to remain above target and a sizeable fiscal impulse is on the way. That backdrop is not fertile ground for more rate cuts and runs the risk that the narrative at the Fed could shift from ongoing easing to a potential return to hikes, particularly if stronger data or stickier prices emerge.

This outlook, while contrarian given the current market consensus for several cuts next year, has some merit, the analysts suggest, pointing to changes in international markets where investors are now pricing rate hikes as the next move in a growing list of economies, including the eurozone, Australia, New Zealand, Canada and Japan, after some of those same markets were leaning toward cuts only weeks earlier.

A similar swing in expectations for the U.S., the bank cautions, could upend risk assets and the 2026 outlook, particularly given how sensitively equities have traded around recent shifts in Fed rhetoric.

"We’ve just seen the fastest rate cuts outside a recession in decades, a scenario that’s often led to a re-acceleration and a return to rate hikes, which has even culminated in recession in a few cases. So central banks are very much walking a tightrope right now," Deutsche Bank said.

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