Deutsche Bank becomes first major bank to predict US recession

“We no longer see the Fed achieve a soft landing. Instead, we expect more aggressive monetary tightening to push the economy into recession,” Deutsche Bank economists, led by Matthew Luzetti, wrote in the report.

This forecast is driven by hot inflation, with consumer prices rising at the fastest rate in 40 years. Hopes for a quick cooling of inflation did not come true, partly because of the war in Ukraine.

Inflationary pressures have widened, raising concerns that the Fed will have to raise interest rates quickly to bring prices under control. Deutsche Bank pointed to how energy and food prices have risen sharply since Russia’s invasion of Ukraine.

“It is now clear that price stability … is likely to be achieved only through restrictive monetary policy, which will significantly reduce demand,” Deutsche Bank economists write.

In other words, the Fed cannot simply slow down the economy. We really need to slow down the economy.

Fed chief Lael Brainard said on Tuesday the Fed will need to cut its balance sheet “quickly” and raise interest rates “methodically” to bring down inflation. “It is very important to bring down inflation,” Brainard said in his report. speech.

“Mild” recession and 5% unemployment

While Deutsche Bank has warned that there is “significant uncertainty” about the exact timing and extent of the downturn, it is now calling for a contraction in the US economy over the last quarter of next year and the first quarter of 2024, “which is in line with a recession during that period.” time.”

The good news is that Deutsche Bank is not forecasting a deep and painful recession like the previous two downturns.

Rather, the bank expects a “mild recession” with the unemployment rate above 5% in 2024. This will still lead to significant layoffs. During the Great Recession unemployment has reached a much higher level 14.7% in 2020 and 10% in 2009.

The coming recession will allow inflation to return to the Fed’s target by the end of 2024, according to Deutsche Bank.

“With the unemployment rate declining only slowly after the peak, inflation should continue to decline, falling to the Fed’s target of 2% in 2025,” Deutsche Bank said in a statement.

Dimon sees slowdown that ‘could easily get worse’

Others have recently warned of the growing possibility of a recession, although for the most part they did not predict an outright recession.

The chance of a recession in the next 12 months is at least one in three, Mark Zandi, chief economist at Moody’s Analytics, told CNN late last month. “Recession risks are uncomfortably high and rising,” Zandi said.
Goldman Sachs also said the chance of a recession had risen to 35%.
“The war in Ukraine and sanctions on Russia will, at the very least, slow down the global economy — and things could easily get worse,” JPMorgan Chase CEO Jamie Dimon wrote in his annual letter to shareholders on Monday, recalling that the 1973 oil embargo had driven prices for energy carriers skyrocketed and plunged the world into recession.

Fed Chairman Jerome Powell, on the other hand, pointed out in a speech last month that there have been instances in the past where the Fed has been able to achieve a soft landing: fighting inflation by raising rates without triggering a recession. Powell cited 1965, 1984 and 1994 as examples.

However, the head of the Fed also admitted that there is no guarantee that she will be able to accomplish this feat this time.

“No one expects a soft landing to be easy in the current environment,” Powell said. “There are very few simple things in the current environment.”

Leave a Reply

Your email address will not be published. Required fields are marked *