Deutsche Bank forecasts a US recession next year

Inflation will not go down as estimated by the budget, according to an expert 1:50

New York (CNN Business) --

The Federal Reserve's fight against inflation will trigger a recession in the United States starting late next year, Deutsche Bank warned Tuesday.

The warning of a recession, the first for a major bank, reflects growing concern that the Federal Reserve will slam on the brakes on the economy so hard that it will inadvertently end a recovery that began just two years ago.

"We no longer see the Fed as achieving a soft landing. Instead, we expect more aggressive monetary policy tightening to push the economy into recession," Deutsche Bank economists led by Matthew Luzzetti wrote in the report.

Is it possible to control current inflation in the US?

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This forecast is driven by red-hot inflation, with consumer prices rising at the fastest pace in 40 years.

Hopes that inflation would cool off quickly have faded, in part because of the war in Ukraine.

Inflationary pressures have amplified, raising fears that the Federal Reserve may have to rapidly raise interest rates to control prices.

Deutsche Bank noted how prices for energy and food commodities have soared since Russia invaded Ukraine.

"It is now clear that price stability... is likely to be achieved only through a tight monetary policy stance that significantly dampens demand," the Deutsche Bank economists wrote.

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In other words, the Federal Reserve cannot just lightly put the brakes on the economy;

you really have to slow it down.

Fed Governor Lael Brainard said Tuesday that the Fed will have to "quickly" shrink its balance sheet and "methodically" raise interest rates to cool inflation.

"It is of the utmost importance to bring inflation down," Brainard said in a speech.

• The US Federal Reserve seeks to raise interest rates to help alleviate rising inflation

"Light" recession and 5% unemployment

Although Deutsche Bank warned that there is "considerable uncertainty" around the exact timing and size of the slowdown, it now expects the US economy to contract during the last quarter of next year and the first quarter of 2024, "consistent with a global recession." during that time".

The good news is that Deutsche Bank is not expecting a deep and painful recession like the last two.

• The United States adds 431,000 jobs in March and unemployment falls to a minimum in the pandemic

Rather, the bank expects a "light recession," with unemployment peaking above 5% in 2024. This would translate into a sizable number of layoffs.

During the Great Recession, unemployment reached much higher levels, at 14.7% in 2020 and 10% in 2009.

This next recession would allow inflation to move back closer to the Fed's target by the end of 2024, according to Deutsche Bank.

"With the unemployment rate slowly receding after the peak, inflation should continue to moderate, falling to the Fed's 2% target in 2025," Deutsche Bank said.

Dimon sees a slowdown that "could easily get worse"

Others have recently warned of the growing likelihood of a recession, though most have refrained from predicting a full-blown slowdown.

Moody's Analytics chief economist Mark Zandi told CNN late last month that the chance of a recession in the next 12 months is at least one in three.

"Recession risks are uncomfortably high, and rising," Zandi said.

Goldman Sachs also said that the chances of a recession have risen to 35%.

"The war in Ukraine and the sanctions on Russia will, at a minimum, slow down the global economy, and it could easily get worse," JPMorgan Chase CEO Jamie Dimon wrote in his annual letter to shareholders on Monday, recalling that the US oil embargo 1973 skyrocketed energy prices and pushed the world into recession.

• JPMorgan CEO says war in Ukraine will slow economy and situation could 'easily get worse'

Federal Reserve Chairman Jerome Powell, for his part, noted in a speech last month that there have been cases in the past where the Fed was able to pull off a soft landing -- fighting inflation by raising interest rates without causing a recession

Powell pointed to 1965, 1984, and 1994 as examples.

However, the Fed chief also admitted that there is no guarantee that he can pull it off this time.

"Nobody expects a soft landing to be easy in the current environment," Powell said, "very few things are easy in the current environment."

Inflation Economic recession