New York (CNN Business) — The Federal Reserve’s fight against inflation will cause a recession in the United States that will begin at the end of next year, Deutsche Bank warned on Tuesday.
The warning of a recession, the first for a major bank, reflects growing concern that the Federal Reserve hit the brakes on the economy so hard to inadvertently end the recovery that began just two years ago.
“We no longer see the Fed as achieving a soft landing. Instead, we expect more aggressive monetary policy tightening to push the economy into recession,” Deutsche Bank economists led by Matthew Luzzetti wrote in the report.
This forecast is driven by the inflation red hot, with consumer prices rising at the fastest rate in 40 years. Hopes that inflation will cool off quickly have faded, in part because of the war in Ukraine.
Inflationary pressures have amplified, raising fears that the Federal Reserve may have to rapidly raise interest rates to control prices. Deutsche Bank noted how energy and food commodity prices 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 dampens demand,” the Deutsche Bank economists wrote.
In other words, the Federal Reserve cannot just lightly put the brakes on the economy; you really have to slow it down.
Fed Governor Lael Brainard said Tuesday that the Fed will have to “quickly” shrink its balance sheet and “methodically” raise interest rates to cool inflation. “It is of paramount importance to bring down inflation,” Brainard said. in a speech.
“Light” recession and 5% unemployment
Although Deutsche Bank warned that there is “considerable uncertainty” around the exact timing and size of the slowdown, it now expects the US economy to contract during the last quarter of next year and the first quarter of 2024, “consistent with a global recession.” during that time”.
The good news is that Deutsche Bank does not foresee a deep and painful recession like the last two.
Rather, the bank expects a “light recession,” with unemployment peaking above 5% in 2024. This would translate into a sizable number of layoffs. During the Great Recession, the unemployment reached much higher levels, of 14.7% in 2020 and 10% in 2009.
This next recession would allow inflation to move back closer to the Fed’s target by the end of 2024, according to Deutsche Bank.
“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 the growing likelihood of a recession, though most have refrained from predicting a full-blown slowdown.
Moody’s Analytics Chief Economist Mark Zandi told CNN late last month that the probability of a recession in the next 12 months is at least one in three. “Recession risks are uncomfortably high, and rising,” Zandi said.
Goldman Sachs also said that the chances of a recession have risen to 35%.
“The war in Ukraine and the sanctions on Russia will, at a minimum, slow down the global economy, and it could easily get worse,” JPMorgan Chase CEO Jamie Dimon wrote in his post on Monday. annual letter to shareholdersrecalling that the 1973 oil embargo sent energy prices skyrocketing and pushed the world into recession.
Federal Reserve Chairman Jerome Powell, for his part, 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 interest 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 can pull it off this time.
“No one expects a soft landing to be easy in the current environment,” Powell said, “very few things are easy in the current environment.”