The Fed will raise rates to 5% to get a grip on inflation, Deutsche Bank says

According toDeutsche Bank, the Federal Reserve will have to raise its policy rate to 5% in order to control inflation.

That doesn't bode well for a policy pivot. Markets priced in a 75-point rate hike from the US central bank next week after August inflation came in above estimates.

Despite the recent jump in market pricing for the fed funds rate, our analysis points to further upside risk to terminal rate expectations.

That's largely because inflation still remains above the Fed's target of 2%, and while other experts have pointed out that prices are falling across the board, job reports show that the labor market is still booming.

The neutral policy rate is no longer restrictive to the economy and the Fed will pursue it before considering cutting it.

The neutral policy rate is achieved by shooting past the inflation rate. If inflation was mild, the terminal policy rate almost always exceeds the inflation rate, even if it was severe.

The economists estimated that the Fed would need a neutral fed funds rate of 2.5% to catch up with inflation.

After accounting for a slightly positive real neutral rate, a terminal rate above 4.5% is likely to be needed.

Inflation and the labor market are tight. The Fed has a range of 2%- 2.5% for the terminal rate.

The risks are skewed in the direction of the hawks. Ray Dalio, a billionaire investor, predicted this week that the stock market would fall 20% if the Fed hiked rates to 4.5%.