Deutsche Bank made a grim forecast earlier this month by saying that the United States will experience a recession, albeit a mild one, causing many to be concerned about the nation's future.
Now, the investment banking company warns people of a deeper downturn that would be caused by the Federal Reserve's quest to mitigate stubbornly high inflation. In a report to clients on Tuesday, Deutsche Bank economists wrote that there will be a U.S. recession in 2022 that will be "worse than expected."
U.S. Recession 2022
The major issue, the economists said, is that while inflation in the country may be peaking, it will take quite a while before it goes back down to the 2% that authorities want it to be. The situation suggests that the central bank will opt to raise interest rates so aggressively that it will instead hurt the economy rather than save it.
In the report, Deutsche Bank economists said that the Fed would more than likely have to stop and put the brakes more firmly to prevent a potential recession. In March, consumer prices increased by 8.5%, a pace that has not been seen in the last four decades, as per CNN.
However, Deutsche Bank's global head of economic research, Peter Hooper, said in an interview that the investment banking company's view of a mild U.S. recession has not become consensus. Economists based their predictions on several factors, some of which have been in place since before the coronavirus pandemic.
This includes climate change and a reversal of globalization, with experts warning that wages were likely to keep going up considering the tight labor market. One of the more pressing issues is a dramatically shifting inflation psychology where those selling goods and services are willing to pass on cost increases, and buyers are willing to accept them.
Worse Than Expected
According to Market Watch, Deutsche Bank said that it would not be surprising to see the core personal consumption expenditures price index, which is the Fed's preferred measure, at 4% to 5% well into next year. Hooper said that the anticipated recession would not be as bad as what was seen in 2008 and the early 1980s.
The economist that led the report, David Folkerts-Landau, said that the Fed would have to raise interest rates much higher than analysts expect to curb inflation properly. His colleagues said that the risks to the investment baking company's outlook seemed clearly skewed to the downside.
The company said that inflation would continue to surpass the Fed's expectations and increase substantially due to a red-hot labor market and various supply-chain issues. The team in charge of the report said, "We will get a major recession, but our strongly held view is that the sooner and the more aggressive the Fed acts, the less longer-term damage to the economy there will be," Markets Insider reported.
Another major issue that drove up inflation in the United States is Russia's unprovoked war on Ukraine that has been going on since Feb. 24. Fears of a potential World War III have kept the world on edge.