Deutsche Bank Sees Fed Raising Key Rates To 5%, Warns Of Recession – Monetary Policy

The US could be on the cusp of an 1980s deja vu as Deutsche Bank analysts signal that the US Federal Reserve (Fed) is adopting tighter-than-expected monetary policy.

The analysts, led by the bank’s chief economist, David Folkerts Landau, say the Fed is likely to raise the federal funds rate this year to a range “between 5% and 6%”, which they say “will be enough.” to complete the task”. [de combater a inflação] this time”.

The “research” note quoted by Bloomberg justifies this forecast of an interest rate hike by the “reinforcement provided by the reduction in the balance sheet which, according to our estimates by our team, will be equivalent to some additional hikes of 25 basis points “ .

For the group led by David Folkerts Landau, these measures will lead the American economy “into a major recession by the end of next year”, even stressing that unemployment will increase “by several percentage points”.

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

Analysts consider themselves “less pessimistic” than their peers at other investment banks, such as Goldman Sachs – which points to a contraction of the American economy of 35% in the next two years, a forecast in line with Bloomberg Economics (Whoever believes that has a 44% chance that the United States will enter a recession by January 2024).

US Federal Reserve Chairman Jerome Powell has previously said the aim is to bring inflation back to the 2% target (having hit 8.5% in March) and preserve a robust labor market.

For Deutsche Bank, a neutral federal funds rate, around 2.5%, as expected by the Fed, is not enough to fight inflation, so it points to 5% and for the interest on the debt US ten-year bonds react to rise in a range between 4.5% and 5%.

The U.S. central bank meets May 3-4, expecting interest rates to rise by half a percentage point and balance sheet shrinking by $9 billion.

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