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Wealth


DEUTSCHE BANK PREDICTS U.S. RECESSION IN ‘23 AS FED BOOSTS RATES


Minutes Signal Fed to Shrink Balance Sheet by $95B/Month
By

Rich Miller

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April 5, 2022, 3:43 PM GMTUpdated onApril 5, 2022, 5:29 PM GMT


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The U.S. will tumble into a recession next year as the Federal Reserve jacks up
interest rates to combat high and widening inflation, Deutsche Bank economists
David Folkerts-Landau and Peter Hooper said in a report on Tuesday.

They see the Fed raising rates by 50 basis points at each of its next three
meetings on its way to a peak above 3.5% by the middle of next year. The Fed’s
current target for the federal funds rate is 0.25% to 0.5%, after it lifted off
levels near zero last month. 

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Deutsche Bank is one of the first major banks to forecast a U.S. recession.
Goldman Sachs Group Inc. economists led by Jan Hatzius said in a report on
Monday that an economic downturn was “far from inevitable,” in part because
consumers and companies are “flush” with cash.




“Our call for a recession in the U.S. next year is currently way out of
consensus,” Folkerts-Landau and Hooper acknowledged in their report, adding, “We
expect it will not be so for long.”




On top of the Fed rate increases, Deutsche forecasts the U.S. central bank will
reduce its $8.9 trillion balance sheet by almost $2 trillion by the end of next
year, the equivalent of three or four additional twenty-five basis point hikes.



“The U.S. economy is expected to take a major hit from the extra Fed tightening
by late next year and early 2024,” Folkerts-Landau and Hooper wrote in a report
entitled “Over the Brink.”



Under the forecast, U.S unemployment rises sharply to 4.9% in 2024. Joblessness
in March clocked in at 3.6%. 

The yield on the 10-year Treasury note is seen climbing to 3.3% this year while
stocks suffer a “transitory decline on the order of 20%” by the summer of 2023
as the recession takes hold.



Folkerts-Landau is group chief economist. Former Fed official Hooper is global
head of economic research.

While Deutsche Bank is among the first major banks to predict a recession, many
finance professionals are coming to the view that a downturn is likely as the
Fed tightens credit, according to a recent survey by Bloomberg.

(Adds stock, bond forecasts in eighth paragraph)




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