Deutsche Bank predicts US recession in ‘23 as Fed boosts rates

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.

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.