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Major bank projects 'mild recession' in late 2023 as result of policies to fight inflation

The Federal Reserve is expected to continue raising interest rates to calm inflation. But Deutsch Bank projects that may shrink the economy.

MINNEAPOLIS — Economists from Deutsche Bank issued a report this week projecting a potential "mild recession" in the United States starting late 2023 into early 2024, arguing that monetary policy to fight inflation will shrink the economy.

After a quarter-point interest rate increase last month, the Federal Reserve has indicated it may move swiftly for even larger half-point increases as soon as next month, a move to slow demand by making borrowing more expensive. Driven in part by COVID-19 recovery and the Russian invasion of Ukraine, among many factors, inflation has reached its highest point in four decades, although it remains considerably lower than the peak of more than 13% in 1980.

In their report, the economists from Deutsche Bank said: "We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession."

Tim Kehoe, a professor of economics at the University of Minnesota, said "there's an argument for raising interest rates" to avoid past instances of "stagflation." During an event last week, in fact, Terry Fitzgerald of the Federal Reserve Bank of Minneapolis explained the Fed was "acutely aware that high inflation is posing significantly hardships... the FOMC and Chair Powell are committed to restoring price stability while preserving a strong labor market."

However, Kehoe said it's unclear whether a recession will occur down the road due to interest rate increases or other variables.

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In his mind, the Ukrainian crisis looms particularly large over the European economy, and he's still waiting to see how things will play out in the U.S.

"I am not a politician. I'm not a political scientist, so I'm not going to make predictions about that. But I am an economist," Kehoe said, "so I'll tell you, if we can get the Ukraine war behind us, I think the outlook for the United States is fairly good."

Tyler Schipper, an associate professor of economics at the University of St. Thomas, said in an email he wasn't familiar with Deutsche Bank's specific prediction yet, but that it may be based on "recent inversions of the yield curve."

"The key detail is that, yes, an inverted yield curve often predicts a recession but the timing is highly uncertain," Schipper said. "It could be 6 months from now it could be 2 years from now. Based on the labor market though, things still look strong."

RELATED: Here's how aggressively the Fed may raise interest rates to fight inflation

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