Is the US entering a recession? Deutsche Bank says it is inevitable.
The chances of a US recession have been hotly debated with the labor market and consumer spending showing resilience even after some of the most aggressive rate hikes in history. But Deutsche Bank sees a 100% probability that the US will have one.
The short-term benchmark fed funds rate is at its highest level since 2006, but inflation is still double the Fed’s target. Fed Chairman Jerome Powell warned after the Fed’s policy committee meeting on Wednesday that more rate hikes are likely to be needed to further cool inflation.
“Looking ahead, almost all committee participants see it as likely that some further rate hikes will be appropriate this year to bring inflation down to 2% over time,”[ads1]; Powell said. The Fed’s median forecast for the Fed Funds rate this year is 5.6%, up from 5.1% in March and above the current Fed Funds target of 5% to 5.25%.
While more interest rate hikes could bring inflation down to 2%, at what cost? Recession, says David Folkerts-Landau, chief economist at Deutsche Bank.
“The US is headed for its first real policy-led boom-bust cycle in at least four decades,” he writes. “The inflation we are seeing was largely induced by expansionary fiscal and monetary policy, and the aggressive rate hikes needed to tame it have now materialized. Avoiding a hard landing would be historically unprecedented.”
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What is Deutsche Bank’s prediction?
- Interest: at least a further 25 basis point increase to the Fed Funds rate in July. “While some progress has been made in rebalancing the labor market and reducing inflation, both are far from the Fed’s goals,” it said.
- Consumption expenses: decline, with excess savings largely spent by October.
- Unemployment: creeping up to just over 4% by the end of the year and 4.5% in the first three months of 2024. May’s unemployment rate was 3.7%.
- Economical growth: a “moderate recession” beginning in the last three months of the year and continuing through the first three months of 2024. Next year, the economy will contract by 0.4%, compared with 1.4% growth this year.
- Inflation: The consumer price index around 2.75% and the core consumer price index, excluding the volatile food and energy sectors, close to 3.5% at the turn of the year. The maize consumer price index was 4%.
There are also other risks
Geopolitics can also affect the investment bank’s outlook. The Russia-Ukraine conflict could intensify as well as the strategic competition between the US and China.
“Another risk is a strong El Niño event leading to new inflationary pressures from higher food prices,” Folkerts-Landau’s team said.
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Are there any bright spots?
Yes, artificial intelligence.
“Given a poor cyclical outlook, low productivity and declining demographics, we are in desperate need of a new source of growth,” and AI could be it, Folkerts-Landau said. However, he said AI will take time to reap benefits — probably not until later this decade.
In the short term, the expected drop in inflation and recession will prompt the Fed to start cutting interest rates in March 2024, he says. Just as the Fed aggressively raised the funds rate, Deutsche Bank expects cuts to come just as quickly “in 50 basis point to 75 basis point intervals until they reach 2.625%.”
Medora Lee is a USA TODAY money, markets and personal finance reporter. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
