Deutsche Bank warns of a major recession 2022-04-26 14:13:00

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Now, it’s a warning of a deeper deflation resulting from the Federal Reserve’s quest to stamp out stubbornly high inflation.

“We will face a major recession,” Deutsche Bank economists wrote in a report to clients on Tuesday.

The problem, according to the bank, is that while inflation may be peaking, it will take “a long time” before it returns to the Fed’s 2% target. This indicates that The central bank will raise interest rates So Strongly It hurts the economy.

Deutsche Bank economists wrote in their ominously titled report: “We consider it … very likely that the Fed will have to squeeze the brakes more firmly, and a deep recession will be needed to bring inflation to its heels,” “Why the next recession? It will be worse than expected.”

behind the curve

Consumer prices jumped 8.5% in March Fastest pace in 40 years. Labor market still burningwith Moody’s Analytics forecasting that the unemployment rate will soon fall to its lowest level since the early 1950s.

To make its case, Deutsche Bank has created an index that tracks the distance between inflation and unemployment over the past 60 years and the Federal Reserve’s stated goals for those metrics. That research found, according to the bank, that the Fed today is “much behind the curve” than it has been since the early 1980s, a period when hyperinflation forced the central bank to raise interest rates to record levels, crushing the economy.

Deutsche Bank said history shows that the Fed has “never been able to correct” smaller excesses of inflation and employment “without pushing the economy into a major recession”.

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Given that the labor market has “further tightened” by up to two percentage points of unemployment, “something stronger than a mild recession will be needed to do the job,” the bank said.

The good news is that Deutsche Bank sees the economy rebounding by mid-2024 as the Fed reverses course in its fight against inflation.

Goldman Sachs: Recession is not inevitable

Of course, no one knows for sure how it will turn out. Although Deutsche Bank is pessimistic – it is the bearishest among the major banks on Wall Street – others assert that this gloom and agony are exaggerated.

Goldman Sachs acknowledges that it will be “extremely difficult” to bring down high inflation and wage growth, but stresses that a recession is “not inevitable”.

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“We don’t need a recession, but we likely need growth to slow to a somewhat lower-than-expected pace, a trajectory that raises recession risks,” Goldman Sachs economists wrote in a report Friday evening.

UBS similarly hopes that the economic expansion will continue despite the Fed’s switch to anti-inflation mode.

“Inflation should fall below current levels, and we do not expect a recession due to higher interest rates,” Mark Heffel, chief investment officer at UBS Global Wealth Management, wrote in a report on Monday.

War and Covid shuts down inflation pressure

Deutsche Bank said the most important factor behind its more negative view is the possibility that inflation will remain “consistently high for longer than generally expected”.

The bank said that many developments will contribute to higher inflation more than it feared, including: reversal of globalization, climate change, further disruptions in the supply chain caused by the war in Ukraine and Covid lockdowns in china And upcoming increases in inflation expectations that will support actual inflation.

“The scourge of inflation is back and now it remains,” Deutsche Bank said.

Endurance: The Fed is about to take a tough line on inflation
If inflation remains high, the Fed will have to consider more dramatic interest rate increases. The Fed raised interest rates by a quarter of a percentage point in March and Chairman Jerome Powell acknowledged last week that… Half-point height “on the table” At next week’s meeting.

“It is very tempting to take a slow approach in the hope that the US economy can land quietly on a sustainable path. That will not happen,” Deutsche Bank said. “Our view is that the only way to reduce the economic, financial, and societal damage of prolonged inflation is to err on the side of doing too much.”

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