The Fed will plunge the US into a major recession by hiking rates above 5%, Deutsche Bank predicts
Fedwill trigger a major US recessionbefore the end of 2023 by hiking rates above 5%, Deutsche Bankhas predicted.
- Many analysts expect the Fed to raise rates to around 3% in 2023 without causing a major growth slowdown.
The lender's economists, led by David Folkerts-Landau, said in a note on Tuesday they believe the Fed will have to raise interest rates much higher than analysts currently expect to successfully stamp down on
"We will get a major recession, but our strongly held view is that the sooner and the more aggressively the Fed acts, the less longer-term damage to the economy there will be," they said.
The Fed raised interest rates for the first time since 2018 in March, as it grapples with the strongest inflation in 40 years. Higher borrowing costs reduce lending and spending in the economy, cooling the pressure on prices.
Analysts expect the Fed to continue hiking interest rates relatively aggressively in 2022 and 2023. Many forecast that the Fed will raise the federal funds target rate to a peak of about 3% by the end of 2023.
By and large, economists believe the Fed can pull off these rate-hike increases without slowing the economy so much as to cause a recession. A recession is commonly defined as two consecutive quarters of falling gross domestic product.
However, Deutsche Bank became the first bank to predict a US recession earlier this month. On Tuesday, it said it now expects the economy to fare worse than it did just days earlier.
"The risks to this outlook seem clearly skewed to the downside — for a more severe recession," Folkerts-Landau and colleagues said.
The economists said they think inflation — which surged to a 41-year high in March — will continue to outstrip expectations due to a red-hot labor market and supply-chain issues.
Therefore, they said, the Fed will have to raise interest rates much higher than many expect to try to control the problem.
"We assume conservatively that a fed funds rate moving well into the 5% to 6% range will be sufficient to do the job this time," they wrote.
They said this would trigger a significant recession by late next year, which will push up unemployment by several percentage points.
Read more: GOLDMAN SACHS: These 6 charts show whether a recession will be necessary to tame skyrocketing inflation
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