The Federal Reserve Might Do What Again?

Eyebrows raised, as did blood pressure and stress when Deutsche Bank became the first bank to forecast a US recession. That was the good news earlier this month. Now there are warnings of a deeper recession caused by the Federal Reserve.

Economists at Deutsche Bank issued a report to clients this week documenting a likely major recession.

According to the bank, while inflation may be at its’ peak, it will take a significant amount of time before it gets back to where the Fed wants it to be, 2%. It suggests that the Fed will raise interest rates so aggressively that it hurts the economy in the short term.

The ominous title of their report, “Why the coming recession will be worse than expected,” is where they were quoted as writing, “We regard it…as highly likely that the fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel.”

We regard it…as highly likely that the fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel.

— Deutsche Bank Economists

What’s Behind It All

Consumer prices jumped 8.5 to 9% in March, a pace not seen in 40 years. The jobs market remains hot right now and Moody analytics projects unemployment rates will soon fall lower than seen since the early 1950s.

Making its case, Deutsche Bank put together an index that tracks inflation and unemployment over the past 60 years and the Fed’s goals for the metrics. According to the bank, research shows that the Fed today is “further behind the curve” than since the 1980s when the central bank raised interest rates to record highs, shattering the economy. It was called Reaganomics.

Throughout history, the Fed has never been able to correct even the smaller overshoots of inflation and employment without pushing the economy deep into recessions reports the Deutsche Bank.

Given that the job market has tightened by as much as two points of unemployment, the bank said, “Something stronger than a mild recession will be needed to do the job.”

The good news, if you can call it that, is that they see the economy rebounding by mid-2024 as the Fed reverses the course of fighting inflation.

War and Covid

Deutsche Bank said that inflation will remain “persistently elevated for longer than generally anticipated.”

Several developments are expected to contribute to higher-than-thought inflation, including the reversal of globalization, climate change, further supply-chain disruptions caused by current China lockdowns and the War in Ukraine, and coming increases to inflation expectations that will support actual inflation.

It’s hopeful to think that a go-slow approach is likely, hoping that the economy here in the US can find a soft landing on a path back to health. They don’t believe that’s likely to happen.

Our view is that the only way to minimize the economic, financial, and societal damages of inflation over the long term is to err on the side of doing too much.

— Deutsche Bank

Hang on tight, because doing too much too fast is the way things appear to be headed. Fed Chairman Jerome Powell conceded that a half-point hike is on the table at the next meeting.

Ways Even A Novice Can Tighten That Belt

We may be in for a long haul, thanks to current events in the world. We’re all going to have to be more frugal in the immediate future. How to manage in these trying times, without giving up life’s precious few joys, is as simple as these five things.

• Shop around and do price comparisons. You might be surprised to find out where you can save a buck or two. Thanks to the internet, it’s not hard to compare offers and check prices while binge-watching your favorite shows on Netflix. Oh, get rid of Netflix. Peacock and Paramount, or Disney and Hulu, are a much better deal.
• Make a budget and stick to it. It’s going to be more important than ever to pay off debts and live within your means. A good budget involves comparing your income with your outgoings to have an accurate idea of how much disposable income you have. This is your opportunity to trim the fat or tighten that belt.
• Analyze your food and restaurant expenses. There are places in our food budgets that we can trim, and usually, we can learn where our wastefulness is at. Do we need that $5.00 fancy coffee or can we take one from home on our morning commute? Taking the time to go through your home menu plan, and only buying the things you need, might trim that budget considerably.
• Organizing debts is important. While the vast majority of adults have some form of debt they need to take care of. Organizing your approach, in most cases, will make your debts more manageable.
• Finding cheap ways to have fun is a good idea. It’s fun to hit a movie, go out to eat, and catch a concert from time to time. Unfortunately, during times of economic depression, sacrifices need to be made to ensure surviving the storms.

Batton Down The Hatches and Hold On Tight

Seriously, that’s all I can think to do. It’s time to tighten things up and get ready to weather the inevitable storm. We have been through a lot these past few years. Unfortunately, we are going to go through a bit more suffering before things get better. But, they’ll get better. They always do.

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References:

Fox News

CNN Money

Market Watch