A recession in the U.S. is brewing as the Federal Reserve is taking a more aggressive stance on raising interest rates to clamp down on inflation, according to economists at Deutsche Bank.
With inflation at a 40-year high, they predict the Fed will raise interest rates by half a percentage point during the next three meetings in May, June and July. That’s in line with the Fed’s thinking, according to minutes from the latest meeting.
When the Fed raises rates, it becomes more expensive to borrow money since interest rates on mortgages, credit cards and other loans increase in tandem. By taking such action, the Fed hopes to slow down the economy without causing a recession.
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In this case, it’s going to be unavoidable, the economists said in a note published Tuesday.
The Fed’s actions will “likely to trigger a mild recession around late 2023,” the note said. “While this will eventually help to push inflation closer to target by the end of 2024, it will also come with a sharp rise in the unemployment rate.”
Deutsche is one of the first major banks to sound the recession alarm.
A spike in oil prices resulting from Russia’s invasion of Ukraine has exacerbated inflation, and also increased the odds that the U.S. will experience a recession. That’s because higher crude costs are driving up gas prices for Americans, causing them to cut back spending in other areas, top economists say.
Nevertheless, gas prices have started to come down from record highs last month, according to data from AAA, which wasn’t adjusted for inflation. As of Wednesday, Americans paid an average of $4.16 a gallon for regular gas, about $1.30 more than a year ago.
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The U.S. unemployment rate, meanwhile, ticked down to 3.6% last month, which is just 0.1% higher than the 50-year record low unemployment rate that occurred before the pandemic.
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here