Looking to address inflation, which is at levels not seen since the 1980s, Federal Reserve Chairman Jerome Powell said this week a half-percentage point interest rate hike “will be on the table” for May, which comes after the central bank increased interest rates by a quarter-percentage point last month.
But the aggressive approach to rein in inflation will come at a cost, Deutsche Bank economists told clients in a report, "Why the coming recession will be worse than expected," on Tuesday.
"We regard it...as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel," said the report.
To make its case, Deutsche Bank created an index that tracks the distance between inflation and unemployment over the past 60 years and the Fed's stated goals for those metrics. That research, according to the bank, finds that the Fed today is "much further behind the curve" than it has been since the early 1980s, a period when extremely high inflation forced the central bank to raise interest rates to record highs, crushing the economy.
History shows the Fed has "never been able to correct" even smaller overshoots of inflation and employment "without pushing the economy into a significant recession," Deutsche Bank said.
Given that the job market has "over-tightened" by as much as two percentage points of unemployment, the bank said, "Something stronger than a mild recession will be needed to do the job." (CNN Business)
Other banks have been a bit more optimistic than Deutsche, with Goldman Sachs saying a recession is “not inevitable.”
Similarly, Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a Monday report that they “do not expect a recession from rising interest rates.”
The news comes as the economy shrank 1.4 percent in the first quarter of 2022, the Commerce Department reported Thursday.