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Deutsche Bank is the first big bank to forecast a US recession


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

That forecast is driven by red-hot inflation, with consumer prices rising at the fastest pace in 40 years. Hopes that inflation would rapidly cool off have been dashed, in part because of the war in Ukraine.

Inflationary pressures have broadened out, raising concern that the Fed will have to rapidly raise interest rates to get prices under control. Deutsche Bank pointed to how energy and food commodity prices have spiked since Russia invaded Ukraine.

“It is now clear that price stability…is likely to only be achieved through a restrictive monetary policy stance that meaningfully dents demand,” the Deutsche Bank economists wrote.

In other words, the Fed can’t just tap the brakes on the economy. It needs to really slow the economy down.

Fed Governor Lael Brainard said Tuesday the Fed will need to “rapidly” shrink its balance sheet and “methodically” raise interest rates to cool off inflation. “It is of paramount importance to get inflation down,” Brainard said in a speech.

‘Mild’ recession and 5% unemployment

Although Deutsche Bank cautioned there is “considerable uncertainty” around the exact timing and size of the downturn, it’s now calling for the US economy to shrink during the final quarter of next year and the first quarter of 2024, “consistent with a recession during that time.”

The good news is Deutsche Bank is not forecasting a deep and painful recession like the past two downturns.

Rather, the bank expects a “mild recession,” with unemployment peaking above 5% in 2024. That would still translate to considerable layoffs. During the Great Recession unemployment peaked at far higher levels of 14.7% in 2020 and 10% in 2009.

This coming recession would allow inflation to get back towards the Fed’s target by the end of 2024, Deutsche Bank said.

“With the unemployment rate receding only slowly following the peak, inflation should continue to moderate, falling to the Fed’s 2% objective in 2025,” Deutsche Bank said.

Dimon sees a slowdown that ‘could easily get worse’

Others have recently warned of a growing probability of a recession, though they have mostly stopped short of predicting an outright downturn.

There is at least a one-in-three chance of a recession in the next 12 months, Moody’s Analytics chief economist Mark Zandi told CNN late last month. “Recession risks are uncomfortably high — and moving higher,” Zandi said.
Goldman Sachs has similarly said recessions chances have climbed to as high as 35%.
“The war in Ukraine and the sanctions on Russia, at a minimum, will slow the global economy — and it could easily get worse,” the JPMorgan Chase CEO Jamie Dimon wrote in his annual shareholder letter Monday, recalling that the 1973 oil embargo sent energy prices skyrocketing and pushed the world into recession.

Fed Chairman Jerome Powell, on the other hand, pointed out in a speech last month that there have been instances in the past where the Fed was able to achieve a soft landing: Fighting inflation by raising rates without causing a recession. Powell pointed to 1965, 1984 and 1994 as examples.

However, the Fed chief also conceded there is no guarantee it will be able to pull off that feat this time.

“No one expects that bringing about a soft landing will be straightforward in the current context,” Powell said, “very little is straightforward in the current context.”



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