Efforts by the Federal Reserve to combat inflation may cause a “mild” recession late next year, according to a Deutsche Bank report written earlier this month. Bank economists cautioned, though, that the downturn would not be as severe as the previous two, predicting unemployment levels of about 5% compared to 14.7% in 2020.
"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.
With consumer prices escalating faster than they have in 40 years, the Fed’s anti-inflation measures could end the recovery that began two years ago when the Biden administration took office, the report says. Now, with Russia’s invasion of Ukraine continuing to raise food and commodity prices in the U.S., hopes that they would cool off have been squashed. The Deutsche Bank is concerned that the Fed may have to quickly raise interest rates to control an upward trend at the cash register, setting off a recession.
"It is of paramount importance to get inflation down," Fed Governor Lael Brainard said in a speech earlier this month, citing the need to "rapidly" shrink its balance sheet and "methodically" raise interest rates to cool off inflation.
Deutsche Bank forecasts that the downturn would allow inflation to approach the Fed's target by the end of 2024. "With the unemployment rate receding only slowly following the peak, inflation should continue to moderate, falling to the Fed's 2% objective in 2025," the report said.
Other economists, though not as decisive as Deutsche Bank, say the chance for recession is palpable. “Recession risks are uncomfortably high — and moving higher,” Moody Analytics’ Chief Economist Mark Zandi told CNN. He predicted a one-in-three chance for a downturn happening within the next 12 months.
In a March speech, Fed Chairman Jerome Powell cited circumstances in which the Fed raised interest rates and did not cause a recession. He also said that today’s landscape may be different.
"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."