“We no longer see the Fed achieving a soft landing. Instead, we anticipate that more aggressive monetary policy tightening will push the economy into recession,” Deutsche Bank economists led by Matthew Luzzetti wrote in the report.
Inflationary pressures have amplified, raising concerns that the Fed will have to quickly raise interest rates to rein in prices. Deutsche Bank noted how prices for energy and food commodities have soared since Russia invaded Ukraine.
“It is now clear that price stability… is likely to be achieved only through a tight monetary policy stance that significantly affects demand,” the Deutsche Bank economists wrote.
In other words, the Federal Reserve cannot simply slam on the brakes on the economy. You really need to slow down the economy.
‘Mild’ recession and 5% unemployment
Although Deutsche Bank has warned that there is “considerable uncertainty” about the exact timing and size of the recession, it is now calling for the US economy to contract during the last quarter of next year and the first quarter of 2024, “in consistent with a recession during that hour.”
The good news is that Deutsche Bank is not forecasting a deep and painful recession like the last two recessions.
This next recession would allow inflation to return to the Fed’s target by the end of 2024, Deutsche Bank said.
“With the unemployment rate slowly receding after the peak, inflation should continue to moderate, falling to the Fed’s 2% target in 2025,” Deutsche Bank said.
Dimon sees a slowdown that ‘could easily get worse’
Others have recently warned of a growing likelihood of a recession, though most have stopped short of predicting a full-on recession.
Fed Chairman Jerome Powell, on the other hand, noted in a speech last month that there have been cases in the past where the Fed was able to pull off 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 that he will be able to achieve that feat this time.
“No one expects a soft landing to be easy in the current environment,” Powell said, “very little is easy in the current environment.”