EDITOR'S NOTE: Yahoo! Finance reports that strategists at Deutsche Bank now believe that “when the Fed begins its long-awaited bond-tapering program as it seeks to tame red-hot inflation, the clock starts ticking on when the U.S. might see another recession.” The bank is predicting tapering will be closely followed by interest rate hikes as early as March 2022. Deutsche Bank sees the tightening of monetary policy continuing through May 2023, at which time “history would suggest a U.S. recession in 2024 or 2025 is a realistic assumption.” This projection suggests that the tough financial times we’re in now are just the tip of the iceberg, and we’re looking at several more years of economic struggles. If Deutsche Bank is right, it means that now is the time to prepare and start protecting your wealth.
When the Fed begins its long-awaited bond-tapering program as it seeks to tame red-hot inflation, the clock starts ticking on when the U.S. might see another recession.
Or so says strategists at Deutsche Bank.
The investment bank predicts the Federal Reserve will accelerate the purchase of its bond purchases in 2022 (and then quickly), opening the door for the first interest rate hike of this economic cycle as early as March.
With that first hike and the end of the tapering program — and ensuing tighter lending conditions — the strategists think the economy will begin cooling down beyond 2024. Then, recession risk will creep into the economic picture for the first time since early on in the pandemic.
"The median and average time to the next recession is 37 and 42 months after the first hike. So that takes us to July 2025 and December 2025 respectively. The earliest gap over 13 cycles is 11 months and that would take us to May 2023," explains Deutsche Bank strategist Jim Reid.
Reid acknowledges past performance on recessions isn't indicative of future performance, however.
"Clearly each cycle is different and many (including me) argue that the Fed is already behind the curve and as such they should have been tightening policy already. This might mean a more compressed cycle relative to history. Alternatively as we saw in the mid-1960s, with the Fed making an error by keeping policy too loose, they delayed the eventual recession to late-1969 but left us with an inflation problem that created big economic problems in the 1970s that the energy shock then compounded. So that is arguably the trade-off. However at this stage, history would suggest a U.S. recession in 2024 or 2025 is a realistic assumption. It could come earlier but that would assume the earlier end of the historical template," Reid says.
The last recession, per the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), began in February 2020 as the COVID-19 pandemic hammered the global economy. In the technical sense, the recession ended in April 2020 said the NBER. While it was a deep recession, at two months the recession was the shortest on record.
Not everyone on the Street is on board with a recession forming on the horizon simply because the Fed starts lifting interest rates.
"We still have a real policy rate that is going to be negative. Real rates are going to be supportive and Fed policy will be accommodative for some time, even if it's not buying mortgage-backed securities and Treasuries," said RSM U.S. chief economist Joseph Brusuelas on Yahoo Finance Live. "The economy is booming."
Originally posted on Yahoo Finance.