Deutsche Bank has said it expects the US to fall into recession in 2023 as the Fed jacks up rates.- It became the first major bank to predict a
US recession , arguing that such as event is necessary to tame inflation.
Deutsche Bank has said it expects the US
The bank's analysts, including chief US economist Matthew Luzzetti, said the Fed has historically triggered recessions when it hikes rates to deal with strong inflation.
"A mild recession will be needed to take sufficient steam out of the economy and labor market to bring inflation back down," they wrote in a major report on the global economy, released Wednesday.
Inflation has soared to a 40-year high in the US as demand has rebounded from coronavirus lockdowns, aided by government stimulus, but supply chains have remained snarled.
The Fed has already raised interest rates by 25 basis points as it tries to cool borrowing and spending. But analysts say the hiking cycle has a long way to go, raising fears about economic growth.
Deutsche expects the Fed to raise the federal funds rate by 50 basis points at each of the next three meetings, and thinks the rate will go above 3.5% next year.
They said the Fed has only avoided inducing a recession when raising interest rates that hard on two occasions. On all other occasions, significant Fed rate hikes were followed within a year or two by recessions, they said.
Luzzetti and his colleagues also pointed to the inversion of the US bond yield curve as a sign that a recession is coming.
Yields on 2-year government bonds, known as Treasury notes, have at moments risen above yields on 10-year notes over the last week or so, suggesting that investors expect growth to be lower in the future.
"Every time the 10-year-2-year Treasury yield curve has gone negative, recession has followed roughly within a year or two," Luzetti and co. wrote.
However, Deutsche Bank's view is far from universal. Most analysts expect the US to avoid recession, pointing to the strength of the labor market and high levels of consumer savings.
Hugh Gimber, market strategist at JPMorgan Asset Management, told Insider that central bank interventions in the bond market mean it's no longer a reliable signal.
"In my view, the level of bond yields today reflects much more the way in which central banks have trampled over bond
Many economists define a recession as two consecutive quarters in which a country's gross domestic product falls. The National Bureau of Economic Research defines it as "a significant decline in economic activity that is spread across the economy and lasts more than a few months."