Early Wall Street Bank To Predict A US Recession Scraps Its Call

(Bloomberg) -- Deutsche Bank AG was the among the first Wall Street banks out of the gates to predict a US recession. Nearly two years later, it’s walking back its call.

The economy performed as well as could be in 2023 with inflation moving toward the Federal Reserve’s 2% target while the labor market remained resilient, economists led by Matthew Luzzetti said in a note Monday. And with easier financial conditions, there’s less of a downside risk to growth.

“We now think the economy will land on this narrow path and that a recession will be averted with limited cost in the labor market,” the report said. “Although inflation could firm some in the near-term, we ultimately believe it is sustainably falling towards the Fed’s target.”

The optimism marks a significant turnaround from Deutsche Bank’s initial recession call made in April 2022 — just after the Fed embarked on what would become its most aggressive interest-rate hiking cycle in decades. 

At the time, the bank’s team predicted the Fed funds rate would rise to between 5% and 6%, resulting in a “significant recession” by late 2023 that would push up the unemployment rate by “several percentage points.”

While interest rates have risen to that level, the unemployment rate stood at 3.7% last month, according to a government report last week. That’s the same reading as April 2022.

Still, Deutsche Bank has been gradually walking back that initial call. In the middle of last year, Vice Chair of Research Peter Hooper said it was essentially a toss-up as to whether the US would fall into recession or not. 

Other economists tempered their tone around that time as well, when it became clearer that inflation was ebbing and the collapse of several regional banks didn’t spiral out into a broader crisis that many anticipated.

The strength of the labor market has routinely confounded economists well beyond Deutsche Bank for the last year or so, including most recently the blockbuster January employment report that beat all estimates. Such vigor has led other economists to delay or reverse their recession calls in recent months — including staff at the Fed.

Read More: BofA Joins Fed in Reversing Recession Call Amid Growing Optimism

Fed officials cemented their pivot to cutting interest rates last week, when they held borrowing costs at the highest level since the early 2000s. However, Chair Jerome Powell pushed back on expectations for cuts to start as soon as March.

Deutsche Bank sees the first cut coming in June, for a cumulative reduction of one percentage point in 2024. Before last week’s Fed meeting, the bank was expecting 1.75 percentage points of cuts this year.

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