“We no longer see the Fed making a soft landing. Instead, we expect more aggressive monetary policy tightening to push the economy into recession, “said Matthew Lujetti, an economist at Deutsche Bank.
Inflationary pressures have spread, raising concerns that the Fed will need to raise interest rates quickly to keep prices in check. Deutsche Bank has pointed out how energy and food prices have risen since Russia invaded Ukraine.
“It is now clear that price stability … can only be achieved through a limited monetary policy position that economically reduces demand,” wrote economists at Deutsche Bank.
In other words, the Fed cannot simply tap into the economy. It really needs to slow down the economy.
‘Mild’ recession and 5% unemployment
Although Deutsche Bank has warned that there is “considerable uncertainty” surrounding the exact timing and size of the recession, it now calls on the US economy to shrink to the last quarter of next year and the first quarter of 2024, “a time coinciding with a recession.”
The good news is that Deutsche Bank is not predicting a deep and painful recession like the last two.
The impending recession will allow inflation to return to the Fed’s target by the end of 2024, according to Deutsche Bank.
Deutsche Bank said: “With the unemployment rate only following a gradual decline following the peak, inflation will continue to moderate, falling below the Fed’s 2% target in 2025,” Deutsche Bank said.
Daemon sees a slowdown that ‘could easily get worse’
Others have recently warned of the growing potential for recession, although they have largely stopped predicting a direct recession.
Fed Chairman Jerome Powell, on the other hand, noted in a speech last month that there have been instances in the past where the Fed has been able to achieve a soft landing: to fight inflation by raising rates without creating a recession. Powell pointed to 1965, 1984 and 1994 as examples.
However, the Fed chief also acknowledged that there was no guarantee that it would be able to stop this achievement.
“No one expects a soft landing to be easy in the current context,” Powell said. “It’s hardly straightforward in the current context.”