BK The Great
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Tough times aheadDeutsche Bank predicted the U.S. will fall into a recession in 2023 that will cause unemployment to go up to 5.1 percent due to the Federal Reserve raising interest rates to bring down inflation.
Deutsche, the first major bank to offer the negative forecast, said the recession will be 'moderate,' but it would serve as yet another blow to already struggling Americans, CNBC reported.
'The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024,' the bank's economists said in a note to clients Tuesday.
'We see two negative quarters of growth and a more than 1.5 percent point rise in the US unemployment rate, developments that clearly qualify as a recession, albeit a moderate one.'
The prediction comes as the Fed voted to raise interest rates last month by a quarter point for the first time in three years to curb inflation, which is at nearly 8 percent and the highest its been in 40 years.
It also comes as 2-year Treasury yield momentarily surpassed the 10-year yield last week, a classic sign that has preceded every US recession.
Deutsche Bank predict a U.S. recession for late 2023 and that the unemployment rate would increase by 1.5 percent, bringing the total out of a job to 5.1 percent (above)
Deutsch Bank, which is based in Germany, is the first major bank to make the prediction
Deutsch said the recession would come as a result of the Federal Reserve's efforts to combat inflation, which hit 7.9 percent in February, the highest in 40 years
While the Federal Reserve is aiming to raise interest rates by 2 percent by the end of 2022, Deutsche anticipates the Fed will go beyond that and raise rates to 3.5 percent into 2023.
The central bank projects overall inflation will be up 4.3 percent just this year. Meanwhile, economic growth is projected at 2.8 percent this year, a steep drop from the 4.0 percent growth projected in December.
Deutsche predicts the fall in growth will only continue in late 2023 and early 2024 and take a toll on US jobs.
Unemployment rate in the US is currently at 3.6 percent, with about 6 million American out of jobs, a steady recovery from the pandemic that had left 20 million unemployed.
Should Deutsche's prediction come true and unemployment increases by 1.5 percent, about 8 million people will be out of work.
Deutsche added that while it expects the US economy to take a hit, the outlook past that is relatively positive.
'Growth is seen recovering thereafter as inflation recedes and the Fed reverses some of its rate hikes,' the bank's economists wrote. 'We acknowledge huge uncertainty around these forecasts, but also note that the risks to the downside and of a deeper downturn are considerable.'
The Federal Reserve has for months planned to hike interest rates for the first time since 2018. Rates were brought to a near-zero rate during the coronavirus pandemic, as Chairman Jerome Powell pursued a policy goal of maximum employment with a higher tolerance for inflation.
'Inflation is likely to take longer to return to our price stability goal than previously projected,' Powell said in a news conference Wednesday. He said that prices are likely to go up yet again in March's figures after Russia's invasion of Ukraine drove up the price of crude oil.
Federal Reserve Jerome Powell predicted inflation to fall by more than 3 percent after the Fed voted to raise interest rates with a plan to keep increasing it to 2 percent by the end of 2022
The U.S. Treasury's 2-year yield (top) had briefly surpassed the 10-year yield (bottom) last week before returning to normal. The phenomenon typically precedes recessions in the US
Still, Powell insisted: 'The American economy is very strong and well positioned to handle tighter monetary policy.'
Deutsche noted that Powell's outcome would be the likely case and that a recession would not stick for long, but said outside of inflation, there were still troubling signs.
Last Thursday, 2-year Treasury yield momentarily surpassed the 10-year yield, meaning the return on investment for the US treasury in the near future outweighed the return for the next decade.
The 2-year yield was at 2.337 percent while the 10 year-yield was at 2.331 percent. As of Tuesday, the 10-year yield went up to 2.542 percent with the 2-year yield still close behind at 2.530
The phenomenon has preceded every American recession in the modern era, CNBC reported.
However, Deutsche warned that if the yields were to invert again and the Fed's efforts prove unsuccessful to bring down inflation, the outcome could be even worse for the U.S.
'Should either of these assumptions prove incorrect, the inflation pressure, central bank tightening, and economic downturns could all be more intense than in our baseline projection,' Deutsche Bank said.
Billionaire hedge fund founder Ray Dalio has warned that the US economy is headed for 'stagflation' similar to that of the 1970s
Ray Dalio's animation explaining historical fiscal cycles
Deutsche's warning come as billionaire hedge fund founder Ray Dalio issued his own warning that the US economy is headed for 'stagflation' similar to that of the 1970s.
'I think that most likely what we're going to have is a period of stagflation. And then you have to understand how to build a portfolio that's balanced for that kind of an environment,' Dalio told Yahoo Finance in an interview published on Monday.
Stagflation is defined as a period of high inflation paired with an economic slowdown and rising unemployment -- an unusual combination that the US faced in the 1970s, when oil crises and failed monetary policy stunned the economy.
'The past is a guide to what's happening now,' said Dalio, the founder of Bridgewater Associates. 'The environment that we're in is beginning to be very much like that of the 1970s.'
Dalio argued that the Fed now faces a bind in which rate hikes will either be too low to reduce inflation, or too high for the economy to withstand.
'So what you have is an enough tightening by the Federal Reserve to deal with inflation adequately, and that is too much tightening for the markets and the economy,' he said.
'The Fed is going to be in a very difficult place a year from now as inflation still remains high and it starts to pinch on both the markets and the economy,' Dalio explained.
Dalio predicted that inflation would settle in at a rate of around 5 percent, which is significantly higher than the Fed's flexible 2 percent target.
'We're beginning a paradigm shift,' he said, explaining that inflationary expectations would only fuel higher prices, as money flees from bonds and workers insist on higher salaries.
'A paradigm shift is beginning to take place, and that will be also self-reinforcing,' he said. 'It's all happened before, it's all happened many many times before.'
Dalio said that the explosion in the money supply was to blame for devaluing currency even as it boosted stock markets.
'When you spend a lot more money than you earn, then you have to print money, to make up that difference,' he said.
How stagflation caused economic misery in the 1970s
The 'Great Inflation' period from 1965 to 1982 was marked by soaring inflation that topped 14 percent by 1980
The inflation is running at the highest level since 1982, when the period known as the 'Great Inflation' was coming to a close.
Spurred by failed monetary policy and two oil crises in 1973 and 1979, the period from 1965 to 1982 was marked by soaring inflation that topped 14 percent by 1980.
The surging inflation was paired with a stagnant economy and high unemployment, leading to the term 'stagflation'.
Consumers suffered greatly from the rising prices, and outrage over the inflation crisis contributed to Ronald Reagan's win over one-term incumbent President Jimmy Carter in 1980.
'Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man,' Reagan famously said on the campaign trail, and he devoted the first years of his presidency to tackling the issue.
Reagan's controversial economic policy had four key pillars: reducing government spending, slashing taxes, reducing regulations, and tightening the monetary supply through higher interest rates.
Naysayers claimed at the time that Reagan's policies would drive prices even higher, but history proved them wrong and inflation was soon back to sustainable levels.
We don't need that fool in office though
