Deutsche Bank issued a grim forecast Tuesday, predicting that the actions by the Federal Reserve to suppress inflation may spark a U.S. recession. The investment bank predicts that recession could hit the country by late 2023.
Deutsche Bank is the first major international bank to sound the alarm on a possible recession in the U.S. The forecast reflects the growing concerns amongst economists on how the Federal Reserve's drastic measures to stabilize the economy could backfire. The country's central bank has been hitting the breaks on the economy hard over the past couple of years in the wake of the COVID-19 pandemic.
Economists at the Frankfurt-based bank said the impact of the Federal Reserve's actions might be irreversible. They added that the continued aggressive monetary tightening policies would push the U.S. economy into recession.
In a speech last month, Fed Chairman Jerome Powell noted that they had been able to prevent a recession in the past while fighting inflation by raising rates. As examples, Powell cited 1965, 1984, and 1994.
Inflation is at an all-time high, with consumer prices growing at the quickest rate in 40 years. Hopes for a swift drop in inflation have been shattered, owing in part to the conflict in Ukraine. Inflationary pressures have widened, prompting fears that the Fed may need to hike interest rates quickly to bring prices under control. The bank noted that since Russia's invasion of Ukraine, energy and food commodity prices have risen dramatically.
To keep inflation under control, Fed Governor Lael Brainard said Tuesday that they would need to rapidly decrease their balance sheet and "methodically" hike interest rates. Despite the fact that there is "significant uncertainty" about the exact timing and magnitude of the downturn, Deutsche Bank now expects the U.S. economy to contract in the fourth quarter of this year and the first quarter of 2024.
The good news is that, unlike the last two downturns, Deutsche Bank does not expect a severe and painful recession. The bank said it expects a "mild recession," with unemployment peaking at around 5% by 2024. The figure is much lower than the peak of 14.7% in 2020 during the height of the pandemic and 10% in 2009.
Others have recently expressed concern about the likelihood of a recession, though they have usually refrained from forecasting a full-fledged occurrence. Moody's Analytics predicted last month that there is a one-in-three possibility of a recession in the next 12 months. Goldman Sachs recently said the possibility of a recession has risen to as high as 35%.