Possible Fed overtightening makes recession more likely than not, Deutsche Bank says

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FILE PHOTO: People shop in a supermarket in Manhattan, New York City

NEW YORK (Reuters) – Despite recent optimism around the U.S. economy, a recession remains a more likely scenario than a so-called “soft landing” as the Federal Reserve seeks to curb inflation by tightening monetary conditions, Deutsche Bank said on Wednesday.

“Given that inflation peaked significantly above target, the Fed should err on the side of tightening too much, rather than too little,” Deutsche Bank analysts said in a note. “A US recession remains more likely than not.”

Investors in recent months have increasingly embraced hopes that the Fed could lower inflation to its 2% target without sending the economy into a tailspin, as economic data showed the economy has remained strong despite the rapid increase in interest rates over the past 18 months.

While that “soft landing” can still be achieved, it remained likely that the Fed would need to “depress demand below potential” to bring inflation to target, said the Deutsche Bank analysts, adding that they expected pressure on the U.S. economy to become more evident early next year.

In contrast to Deutsche Bank’s forecasts, several banks have in recent months revised or pushed out their earlier recession calls. Goldman Sachs analysts on Monday said they had further reduced their 12-month U.S. recession probability to 15% from a previous 20% estimate.

(Reporting by Davide Barbuscia; Editing by Paul Simao)

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