Deutsche Bank sees Fed raising key interest rate to 5%, warns of recession – Monetary policy

The U.S. may be on the brink of a “déjà vu” crisis in the 1980s, when Deutsche Bank analysts suggest the U.S. Federal Reserve (Fed) is adopting a more restrictive monetary policy than expected.

Analysts led by the bank’s chief economist, David Folkerts Landau, say the Fed should raise the federal fund rate this year to “between 5% and 6%”, which they say is “enough to do the job. [de combater a inflação] this time”.

A “study” quoted by Bloomberg justifies this forecast of a rise in interest rates with “a confirmation of a reduction in the balance sheet, which our team estimates will correspond to some additional increases of 25 basis points.”

For a group led by David Folkerts Landau, these measures will lead to a “significant recession in the U.S. economy by the end of next year,” even showing unemployment rising “by several percentage points.”

Yet the German bank stresses that the recession is a necessary evil in the fight against inflation. “We will be in a major recession, but we firmly believe that the faster and more aggressively the Fed acts, the less damage the economy will suffer in the long run.”

Analysts consider themselves “less pessimistic” than their counterparts in other investment banks, such as Goldman Sachs – suggesting a 35 percent contraction in the U.S. economy over the next two years, which is in line with Bloomberg Economics’ forecast. there is a 44% probability that the United States will face a recession by January 2024).

U.S. Federal Reserve Chairman Jerome Powell has already stated that the goal is to lower inflation to 2 percent (which was 8.5 percent in March) and maintain a strong labor market.

For Deutsche Bank, the central bank’s neutral federal fund rate, around 2.5%, is not enough to fight inflation, so it points to 5% and so that the US debt rate will react within a range of ten years. between 4.5% and 5%.

The US Federal Reserve will meet on May 3 and 4 and expects interest rates to rise by half a percentage point and balance sheets to fall by $ 9 billion.

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