Deutsche Bank says raising interest rates by the Fed will lead to a recession

As the Federal Reserve signals its intention to continue aggressively raising interest rates to combat record high inflation, banking giant Deutsche Bank became the first major institution this week to warn of a possible US recession.

On Tuesday, reported CNN The call for a recession – the first from a major bank – reflects growing concern that the Fed will brake the economy so hard that it will inadvertently end the recovery that began just two years ago.

“We no longer see the Fed achieving a soft landing. “On the contrary, we expect that a more aggressive tightening of monetary policy will push the economy into recession,” Deutsche Bank economists led by Matthew Luzzetti wrote in the report.

Minutes after their policy meeting three weeks ago on Wednesday, Fed officials said aggressive half-price hikes – instead of the traditional quarterly hikes – “could be appropriate” several times this year.

At last month’s meeting, many Fed policymakers favored a half-point increase, according to the minutes, but were postponed due to uncertainty over Russia’s invasion of Ukraine. Instead, the Fed raised its key short-term interest rate by a quarter and indicated it plans to continue raising interest rates next year.

According to CNN, although Deutsche Bank has warned that there is “significant uncertainty” about the exact time and magnitude of the recession, it is now calling for the US economy to shrink in the last quarter of next year and the first quarter of 2024. “According to recession at that time”.

The good news is that Deutsche Bank does not predict a deep and painful recession like the previous two falls.

Instead, the bank expects a “mild recession”, with unemployment peaking at more than 5% in 2024. This would still translate into significant layoffs.

Some other major financial institutions, however, are more optimistic about the downstream impact of the Fed’s expected series of interest rate hikes.

reported Bloomberg News The economists at Goldman Sachs Group Inc. led by Jan Hatzius said in a report on Monday that a recession was not “very inevitable”, in part because consumers and companies were “laundering” cash.

“Our call for a recession in the United States next year is currently a way out of the consensus,” said Deutsche Bank economists David Faulkers-Landau and Peter Hooper. ยป.

Higher interest rates from the Fed will increase the cost of borrowing on mortgages, car loans, credit cards and corporate loans. In doing so, the Fed hopes to slow economic growth and raise wages enough to curb high inflation, which has plagued millions of households and posed a serious political threat to President Joe Biden.

Many economists said they were concerned that the Fed had waited too long to start raising interest rates and that policymakers could end up responding so aggressively as to trigger a recession.

President Jerome Powell opened the door two weeks ago to raise interest rates by up to half a point in the coming meetings, instead of a traditional quarter point. The Fed has not raised interest rates by half a unit since 2000. Lael Brainard, a key member of the Fed’s board, and other officials have also made it clear that such sharp increases are possible. Most economists now expect the Fed to raise interest rates by half a point in both its May and June meetings.

Speaking on Tuesday, Brainard underlined the Fed’s growing aggression, saying that central bank bonds would “shrink significantly faster” in a “much shorter period” than the last time the Fed cut its balance sheet, from 2017- 2019. At that time, the balance sheet was about $ 4.5 trillion. Now, it’s double.

Contribution: Associated Press

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