Last Tuesday, two days before the United States announced an unexpected cut in GDP in the first quarter, a team of Deutsche Bank economists released a research note explaining what they said “Why the next recession will be worse than expected”, moving further away from the consensus. Already in early April, Deutsche Bank became the first bank to predict a recession “light”in the world’s largest economy by the end of 2023 or even early 2024, now David Falkerts-Landau, Peter Hooper and strategist Jim Reed argue that GDP cuts will eventually be deeper than originally expected.
“We will have a serious recession”they warn, not by quoting numbers, but by referring “To the early years of Walker” The head of the US Federal Reserve, known for pushing the US into the worst recession since the Great Depression: GDP fell 8% in the second quarter of 1980 and 0.5% in the third quarter, with unemployment rising in 1981 to 11 %. To fight inflation, economist Paul Walker, who was appointed chairman of the central bank in 1979 by Democratic President Jimmy Carter, raised the key interest rate to 20% in 1980. Inflation, which peaked at 13.5% in 1981, fell to 3.2% in 1988. .
READ ALSO : Death of Paul Walker, one of the parents of the independent Fed
Today, inflation is the highest since 1981. The consumer price index rose 8.5% year on year in March, prompting Deutsche Bank to say that the Fed has already it will be too late to raise the key interest rate at which commercial banks are based on lending to businesses and households, so aggressively that it will inevitably have a major impact on the economy. According to the authors of the note, unemployment should be expected to increase by several percentage points. but, “The faster and more aggressive the Fed, the less long-term damage to the economy. […] The United States is fortunate to have an independent central bank that does what is good for the country, even if it means an imminent recession. »
The biggest delay since the 80’s
Of course, tightening monetary policy is a decision that affects all of us as a society, so, according to the bank, “It would be very tempting to take a slow approach, hoping that the US economy can stabilize” in complete solitude. Better stop dreaming “It simply came to our notice then. » Even if inflation peaks, it will take time ” A lot of time “ before it returns to the 2% target set by the Federal Reserve. “The plague of inflation is back and it will stay here”, in a world where war in Ukraine, Covid ‘s resilience in China and deglobalization are raising prices. ” The labor market and household balance sheets are strong, and the only way to reduce aggregate demand is to raise rates as high and fast as it may seem reasonable. ”we recommend Deutsche Bank, where we think the central bank has already taken too long to raise the key rate.
How bad is the Fed “late on the curve” ? As never before since the early 1980s, economists have responded with an internal index, the Fed’s Disaster Index, which measures the gap between current inflation and unemployment rates against the central bank’s mandate for price stability and full employment: inflation is too high and the unemployment rate (3.6% in March) has fallen too fast, so the improvement in performance is sustainable. However, the Fed’s “misery index” is now above 5. However, as David Falkerts-Landau, Peter Hooper and Jim Reed explained, “In the past, every time the index rose significantly above zero, the economy went into recession. »
“The big problem in the profession”
Recently, US Federal Reserve Chairman Jerome Powell pointed out that episodes of tightening monetary policy in the mid-1960s, 1980s and 1990s were not accompanied by recessions. Really. But Deutsche Bank responds that these phases of rate hikes occurred when the index was close to zero. “It was a very different environment from the much more difficult one that the Fed is facing today. Previously, the Fed was generally much ahead. » For Deutsche Bank teams, a recession seems so inevitable that it is surprising to them that most economists continue to rely on a soft landing. “I am very surprised by this observation”writes David Falkerts-Landau, chief economist of the bank. “We are currently experiencing a paradigm shift in macroeconomics. The consensus, for which there is usually little deviation from this median forecast, has been consistently incorrect over the past ten years and, in fact, over the past two years. Forecasters underestimated the scale of the economic recovery from the pandemic, they underestimated the inflationary impact of stimulus packages and the fact that this inflation was not temporary. Do we have a huge problem in the profession with models that no longer fit the purpose? These same forecasters and models now expect us to believe that there will be a soft landing with such a level of inflation that there has never been a soft landing. »
Goldman Sachs, which does not yet see GDP cuts, recently simply acknowledged that the risk of a recession in the US over the next two years rose to 38% in late April. At UBS, we continue to hope that economic growth will continue despite the central banks’ war on inflation. But, in particular, admits Mark Dowding, head of investment at the asset management company BlueBay Asset Management, “A recession becomes more likely if the Fed continues to raise its rate above the rate [intérêt réel] neutral, which politicians estimate at about 2.5%. »
Three more increases of at least 50 basis points are expected in June, July and September
| Photo: Bloomberg
The US Federal Reserve is due to announce tomorrow evening, at the end of a meeting of the Monetary Policy Committee, an increase in the key key rate by 50 basis points to bring it to 0.75-1%. Three more increases of 50 basis points are expected in June, July and September, according to estimates by the financial information agency Bloomberg, formed from the position of investors in the interest rate market. Then, in November and December, the Fed is expected to slow its pace at the last two meetings of the year. On this basis, the nominal key interest rate in the United States [hors inflation] should reach at least 2-2.25% by the end of 2022 before reaching a trend of 3% in 2023. According to CME, in the market for futures contracts Fed Funds, which has its own calculation model, the key rate should increase by at least 3% by the end of this year, to reach, with a chance of more than 50%, the level of 3.5- 3.75% at the beginning of the summer of 2023.