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A major recession is coming, Deutsche Bank warns

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CNN
By Matt Egan

New York CNN Business —

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Deutsche Bank raised eyebrows earlier this month by becoming the first major bank to forecast a US recession, albeit a mild one.

Now, its warning of a deeper downturn caused by the Federal Reserves quest to knock down stubbornly high inflation.

We will get a major recession, Deutsche Bank economists wrote in a report to clients on Tuesday.

The problem, according to the bank, is that while inflation may be peaking, it will take a long time before it gets back down to the Feds goal of 2%. That suggests the central bank will raise interest rates so aggressively that it hurts the economy.

We regard itas 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 wrote in its report with the ominous title, Why the coming recession will be worse than expected.

Behind the curve

Consumer prices spiked by 8.5% in March, the fastest pace in 40 years. The jobs market remains on fire, with Moodys Analytics projecting that the unemployment rate will soon fall to the lowest level since the early 1950s.

To make its case, Deutsche Bank created an index that tracks the distance between inflation and unemployment over the past 60 years and the Feds stated goals for those metrics. That research, according to the bank, finds that the Fed today is much further behind the curve than it has been since the early 1980s, a period when extremely high inflation forced the central bank to raise interest rates to record highs, crushing the economy.

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