The U.S. is headed for a major recession as the Federal Reserve continues to pursue its hawkish stance on stubbornly high inflation, according to Deutsche Bank economists.
In a recent report, the bank said the Fed’s interest rate hike could take longer than previously expected to tame inflationary pressure that has bedeviled the U.S. and other major economies as the world comes out of two years of on-and-off covid-19 lockdowns and supply chain constraints.
“We will get a major recession,” Deutsche Bank economists wrote in a report to clients in late April.
Surging food, energy, and housing costs sent consumer prices soaring by 8.5 percent in March 2022, a tenth of a percent more than predicted and the highest rate since 1981, according to the U.S. Labor Department’s consumer price index (CPI) report.
The Fed targets a 6 percent federal funds rate with an ultimate goal of bringing inflation down to 2 percent and plans to make aggressive policies to stem shocks that could send consumer prices even higher.
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“We assume conservatively that a Fed funds rate moving well into the 5 percent to 6 percent range will be sufficient to do the job this time,” said the authors of the Deutsche Bank report, including Group Chief Economist David Folkerts-Landau.
“[It’s] highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel.”
The prediction came less than a month after Deutsche Bank said the U.S. would experience a “mild” recession. It now expects “a major recession” in late 2023 to early 2024.
The only way the economists think America can minimize the impact of the prolonged inflation cycle is to “to err on the side of doing too much” by the Fed rapidly increasing interest rates, pushing growth lower.
This is the most bearish forecast among banks with Goldman Sachs predicting the chances of a recession within the next two years to be 35 percent. Morgan Stanley’s chief investment officer wrote last month that her team was “far from calling a U.S. recession.”
Photo: Aja Silver, 9, shops for birthday cake designs with her mother Shawn Silver, at a Giant grocery store in Silver Spring, Md., April 6, 2009. During the recession, parents nixed fancy birthday parties, music lessons, sports leagues and gifts, figuring out ways to dote without opening their wallets. (AP Photo/Jacquelyn Martin)