Deutsche Bank is the first big bank to forecast a US recession

“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.

That forecast is fueled by red-hot inflation, with consumer prices rising at the fastest pace in 40 years. Hopes that inflation would cool off quickly have faded, in part because of the war in Ukraine.

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.

Fed Governor Lael Brainard said Tuesday that the Fed will need to “quickly” shrink its balance sheet and “methodically” raise interest rates to cool inflation. “It is of the utmost importance to reduce inflation,” Brainard said in a speech.

‘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.

Rather, the bank expects a “mild recession,” with unemployment topping 5% in 2024. That would still translate to sizable layoffs. During the Great Recession, unemployment reached much higher levels of 14.7% in 2020 and 10% in 2009.

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.

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 has similarly said that the chances of a recession have risen to as high as 35%.
“The war in Ukraine and sanctions on Russia will, at a minimum, slow the global economy, and it could easily get worse,” JPMorgan Chase CEO Jamie Dimon wrote in his annual letter to shareholders on Monday, recalling that the embargo The 1973 oil tanker sent energy prices skyrocketing and pushed the world into 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.”

Leave a Comment