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Fed Governor Jerome Powell. Photo: Valerie Plesch / Bloomberg – |
Deutsche Bank became the first Wall Street company this month to warn of an impending economic recession in the United States.
German bank economists are now forecasting a severe recession over the next two years as the Federal Reserve seeks to cool the worst inflation in four decades through a series of aggressive interest rate hikes, Fox News reported.
“We will witness a major recession, but our firm view is that the sooner and more aggressively the Fed acts, the less long-term damage there will be to the economy,” analysts wrote.
Deutsche Bank had previously predicted a “slight” recession, but recent figures have forced it to change its forecast. Economists now believe that inflation is so fast that the Fed will have no choice but to drastically raise interest rates to crush consumer demand.
“We believe … it is very likely that the Fed will have to put the brakes on even harder and that a deep recession will be needed to curb inflation,” analysts wrote in a report entitled “Why the impending recession will be worse.” than expected “.
There are growing fears on Wall Street that the Fed may inadvertently cause a recession as it takes a more aggressive approach to fighting inflation, which has reached its highest level since December 1981. Central bank officials raised interest rates by a quarter of a percentage point in March and confirmed that a sharper increase is likely in the coming months, starting in May.
“It is appropriate to move a little faster,” Fed Chairman Jerome Powell said last week during a panel discussion at spring meetings of the International Monetary Fund (IMF) and the World Bank.
Traders are now confident that interest rates will increase by at least 50 basis points when Fed employees meet on May 3-4. This will be the first time since 2000 that the US Federal Reserve has raised interest rates to such an extent.
Some economists believe the Fed has waited too long to take action against inflation, while others have expressed concern that a too-quick and aggressive response risks causing an economic recession.
Rising interest rates have led to higher interest rates on consumer and business credit, which has slowed the economy, forcing employers to cut costs.
Powell dismissed fears that further tightening of central bank policies would cause a recession, and expressed optimism that the Fed could strike a delicate balance in curbing inflation without crushing the economy.
However, he acknowledged the difficulty of the task ahead and said it was “very important” for Fed employees to restore price stability.
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