By Nathalie Voit
The country is heading toward a major recession, Deutsche Bank said in its latest report.
In a letter written to clients on April 26 and confirmed by CNN, Deutsche Bank warned of a deeper economic downturn than the one it had initially forecast earlier this month.
“We will get a major recession,” Deutsche Bank economists wrote in a report ominously entitled: “Why the coming recession will be worse than expected.”
According to the bank, board members of the Federal Reserve will have to significantly raise interest rates if they wish to counter stubbornly high inflation. However, aggressive interest rates can trigger a recession.
“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,” the economists said.
If the Fed wishes to bring down inflation to its 2% annual target rate, it must be prepared to potentially crush the economy, Deutsche Bank said.
Historically, 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.
And the rate of inflation in the U.S. is far from low at 8.5%, according to the latest Labor Department data from March. Additionally, the jobs market remains eerily tight. According to Moody’s Analytics, the unemployment rate is nearing its lowest level since the 1950s.
Given the large gap between inflation and employment, nothing less than a “significant recession” will be needed to do the job, the economists said.
However, in a rare show of optimism, Deutsche Bank did add the economy should rebound by mid-2024.
The bank blamed the return of protectionist policies, climate change, and ongoing supply-chain woes prompted by the war in Ukraine and continuing COVID-19 lockdowns in China for its gloomy outlook.
“The scourge of inflation has returned and is here to stay,” Deutsche Bank said in the report.
