- A significant recession by next year seems likely, it says
- U.S. unemployment may rise several points, economists project
The Federal Reserve is likely to need to engage in the most aggressive monetary tightening since the 1980s to tamp down an inflation rate at a four-decade high, which will lead to a deep U.S. recession next year, reports CNN quoting a warning by Deutsche Bank AG economists.
Monetary-tightening process
“We assume conservatively that a Fed funds rate moving well into the 5% to 6% range will be sufficient to do the job this time,” the authors including David Folkerts-Landau, group chief economist and head of research, wrote in a report Tuesday.
“This is partly because the monetary-tightening process will be bolstered by Fed balance-sheet reduction, which our U.S. economics team estimates will be equivalent to a couple additional 25 basis-point rate hikes.”
This monetary tightening and the financial upheaval that accompanies it “will push the economy into a significant recession by late next year,” Folkerts-Landau said, adding Deutsche sees the unemployment ultimately rising “several percentage points.”
Will there be a major recession?
The Deutsche economists — by their own admission — are much more pessimistic than most other major forecasters. Goldman Sachs Group Inc. estimated chances of a contraction at about 35% over the next two years.
Bloomberg Economics’ recession-probability model has estimated a 44% chance of recession happening before January 2024.
Fed Chair Jerome Powell and his colleagues have said their goal is to achieve a soft landing — cooling the U.S. economy to bring inflation back down toward their 2% goal while preserving a robust labor market. The Federal Open Market Committee is expected to raise rates by half a percentage point at its May 3-4 meeting and announce it’ll start shrinking its $9 trillion balance sheet.
In the Deutsche economists’ view, the FOMC’s plans to raise rates to a neutral level — one that neither stimulates nor contracts growth — of around 2.5% won’t go nearly far enough to ease inflation. That’s because of a rising-price psychology taking root among American households, and an extremely tight labor market, where unemployment has fallen to 3.6%.
Deutsche estimated a neutral rate that’s much higher than the Fed’s view, around 5%, and projected the 10-year U.S. Treasury yield will rise to 4.5% to 5%.
“We will get a major recession, but our strongly held view is that the sooner and the more aggressively the Fed acts, the less longer-term damage to the economy there will be,” the authors concluded.
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Source: CNN
