Deutsche Bank sees Fed raise key rates to 5%, warns of recession – monetary policy

The US may be on the cusp of “deja vu” in the 1980s as Deutsche Bank analysts suggest the US Federal Reserve is adopting a more restrictive monetary policy than expected.

For analysts, led by the bank’s chief economist, David Volkerts Landau, the Fed should raise the federal funds rate this year to a range of “between 5% and 6%,” which, in their view, would be “enough to get the job done.” [de combater a inflação] this time”.

The “research” note cited by Bloomberg justifies this rate hike prediction with “the reinforcement provided by the balance sheet reduction that our team estimates will equate to some additional 25 basis point increases.”

For the group led by David Volkerts-Landau, these measures will lead the US economy “into a major recession by the end of next year,” noting that unemployment will rise “by several percentage points.”

However, the German bank stresses that stagnation is a necessary evil in the fight against inflation. “We will face a major recession, but we firmly believe that the sooner the Fed acts aggressively, the less damage the economy will suffer in the long run.”

Analysts consider themselves “less pessimistic” than peers at other investment banks, such as Goldman Sachs – suggesting a 35% contraction in the US economy in the next two years, a forecast in line with Bloomberg Economics. That is a 44% chance that the United States will enter a recession by January 2024.

US Federal Reserve Chairman Jerome Powell has already stated that the goal is to bring inflation down to a 2% target (after hitting 8.5% in March) and maintain a strong labor market.

For Deutsche Bank, the neutral Fed rate, around 2.5%, as projected by the Fed, is not enough to fight inflation, so it is pointing to 5%, so the interest on the ten-year US debt responds to a rise to a range. Between 4.5% to 5%.

The US central bank meets on May 3 and 4, and expects an increase in interest rates by half a percentage point and a reduction in the balance sheet by nine billion dollars.