NEW YORK— Deutsche Bank has published a new economic forecast that sees a “major recession” coming.
The bank’s economists say the driver of the recession will be the Federal Reserve’s efforts to knock down ongoing high inflation.
The problem, according to the bank, is that while inflation may be peaking, it will take a "long time" before it gets back down to the Fed's goal of 2%. That suggests the central bank will raise interest rates so aggressively it hurts the economy, reported CNN in its analysis.
"We regard it...as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel," Deutsche Bank economists wrote in its report with what CNN called an “ominous” title, "Why the coming recession will be worse than expected."
In support of its position, Deutsche Bank created an index that tracks the distance between inflation and unemployment over the past 60 years and the Fed's stated goals for those metrics. That research, according to the bank, finds that the Fed today is "much further behind the curve" than it has been since the early 1980s, a period when extremely high inflation forced the central bank to raise interest rates to record highs, “crushing the economy,” CNN stated.
What History Shows
History shows the Fed has "never been able to correct" even smaller overshoots of inflation and employment "without pushing the economy into a significant recession," Deutsche Bank said, according to the report.
According to Deutsche Bank, given that the job has “over-tightened” by as much as two percentage points of unemployment, the bank’s economists stated, “Something stronger than a mild recession will be needed to do the job.”
If there is good news it is that Deutsche Bank sees the economy rebounding by mid-2024 as the Fed reverses course in the inflation fight, CNN added.
The report added that while Deutsche Bank is pessimistic and the most bearish among Wall Street’s major banks, other banks do not share the same gloom and doom. Goldman Sachs, for instance, concedes it will be “very challenging” to bring down high inflation and wage growth, but it also stressed that a recession is “not inevitable.”