Spreading inflation and the requisite interest rate hikes to combat it likely will send the U.S. into recession in 2023, according to Deutsche Bank economists. The first major bank to forecast negative growth ahead, Deutsche cited inflation trending around 8% that will push the Federal Reserve into an aggressive tightening cycle. While Deutsche characterized the recession as probably "moderate," it noted that the risks are to the downside. "The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024," the bank's economists said in a note to clients Tuesday. "We see two negative quarters of growth and a more than 1.5% pt rise in the US unemployment rate, developments that clearly qualify as a recession, albeit a moderate one." Fed officials last month approved their first interest rate hike in more than three years in an attempt to quell inflation running well ahead of the central bank's 2% target. Markets anticipate increases at each of the six remaining meetings this year likely taking the Fed's benchmark short-term borrowing rate to about 2.5%. Deutsche said it anticipates the Fed going beyond that into 2023 until the fed funds rate hits about 3.5%. In addition, a rundown of bond holdings on the Fed's balance sheet is figured to add another 0.75% of tightening. "Growth is seen recovering thereafter as inflation recedes and the Fed reverses some of its rate hikes," the economists wrote. "We acknowledge huge uncertainty around these forecasts, but also note that the risks to the downside and of a deeper downturn are considerable." The bond market recently has flashed a classic recession indicator , in which the 2-year Treasury yield rises above the 10-year note. The inversion has preceded virtually all U.S. recessions in the modern era, though some think markets are distorted in the current case and the signal may not prevail. Deutsche's forecast is dependent on rate hikes bringing down inflation to acceptable levels, which is the bank's most likely case. However, if that does not happen and inflation expectations become unmoored, the outcomes could be worse. "Should either of these assumptions prove incorrect, the inflation pressure, central bank tightening, and economic downturns could all be more intense than in our baseline projection," Deutsche Bank said.
