Deutsche Bank is the first major bank to predict US recession

The Federal Reserve’s fight against inflation will trigger a recession in the United States that will start at the end of next year, Deutsche Bank warned last Tuesday (5).

The recession alarm – the first from a major bank – reflects growing concern that the Fed will rein in the economy so hard that it will inadvertently end the recovery that began just two years ago.

“We no longer see the Fed achieving a soft landing. Instead, we predict that a more aggressive tightening of monetary policy will lead the economy into a recession,” Deutsche Bank economists led by Matthew Luzzetti wrote in the report.

That forecast is driven by red-hot inflation, with consumer prices rising at the fastest pace in 40 years.

Hopes that inflation would cool quickly were dashed, in part because of the war in Ukraine.

Inflation pressures have mounted, raising concerns that the Fed will have to quickly raise interest rates to keep prices in check.

Deutsche Bank pointed to how prices for energy and food commodities have soared since Russia invaded Ukraine. “It is now clear that price stability will likely only be achieved through a tight monetary policy stance that significantly harms demand,” the Deutsche Bank economists wrote.

In other words, the Fed cannot simply put the brakes on the economy. It really needs to slow down the economy.

Fed director Lael Brainard said on Tuesday that the central bank will need to “rapidly” shrink its balance sheet and “methodically” raise interest rates to cool inflation.

“It is of paramount importance to reduce inflation,” Brainard said in a speech.

‘Mild’ recession and 5% unemployment

While Deutsche Bank has warned that there is “considerable uncertainty” around the exact timing and size of the downturn, it now predicts the U.S. economy will shrink between the last quarter of next year and the first quarter of 2024, “consistent with a recession.” during this period”.

The good news is that Deutsche Bank is not anticipating a deep and painful recession like the last two.

Instead, the bank expects a “mild recession”, with unemployment peaking above 5% in 2024. That would still translate into considerable layoffs. During the Great Recession, unemployment reached much higher levels of 14.7% in 2020 and 10% in 2009.

This upcoming recession would allow inflation to return to the Fed’s target by the end of 2024, Deutsche Bank said.

“With the unemployment rate retreating only slowly after peaking, inflation is expected to remain moderate, falling to the Fed’s 2% target in 2025,” Deutsche Bank said.

Dimon sees a slowdown that ‘can easily get worse’

Others have recently warned of an increasing likelihood of a recession, although most have stopped predicting an outright slowdown.

There is at least a one in three chance of a recession in the next 12 months, Moody’s Analytics chief economist Mark Zandi told CNN late last month.

“Recession risks are uncomfortably high – and rising,” Zandi said.

Goldman Sachs also said the odds of a recession reached 35%.

“The war in Ukraine and sanctions on Russia, at the very least, will slow the global economy – and could easily get worse,” JPMorgan Chase CEO Jamie Dimon wrote in his annual letter to shareholders on Monday, noting that the The 1973 oil embargo sent energy prices soaring and sent 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 achieved a soft landing: fighting inflation by raising rates without causing a recession.

Powell pointed to 1965, 1984 and 1994 as examples.

However, the Fed chief also admitted that there is no guarantee he will be able to pull off that feat this time around.

“Nobody expects a soft landing to be simple in the current context,” Powell said, “very few things are simple in the current context.”