After the first warning of a recession in the U.S. economy in April this year, Deutsche Bank once once more gave a surprising forecast, predicting that following the Federal Reserve (Fed) ends its interest rate hike cycle in the first quarter of next year, the terminal interest rate will be as high as 4.9%, far far more than the market price.
Investors are still trying to understand the likelihood that the Fed rate will rise above 4% by the end of the year. U.S. stocks posted their biggest one-day drop in more than two years on Tuesday (13th) as U.S. CPI unexpectedly soared in August, sparking discussions regarding the Fed raising interest rates by 4 yards next week, and FedEx subsequently put forward a pessimistic view on the global economy , making the U.S. stock market face even heavier pressure.
Except for Deutsche Bank, few people in the market have given an expectation of an end-point interest rate approaching 5%, which is almost twice the current interest rate range. If the prediction comes true, the impact on the stock market may be greater than that of Bridgewater Fund founder Dalio. (Ray Dalio) imagined it was even more serious. Dalio recently estimated that the Fed raising interest rates to 4.5% may lead to a 20% plunge in U.S. stocks.
Meanwhile, U.S. one-year Treasury yields hovered around 4 percent on Friday, with some believing the situation might spill over to other interest rates, fueling worries in U.S. and overseas financial markets.
Matt Luzzetti, chief U.S. economist at Deutsche Bank, said the revised rate forecast reflected his expectations for the state of inflation and for higher inflation to last longer.
“In all past tightening cycles, the Fed has always raised its target rate above the inflation rate, regardless of whether inflation is high or not,” he said. To maintain restrictive policy, he believes real or inflation-adjusted rates must be positive, and the Fed should not rely on expectations that “inflation will decline over time” for now.
Luzzetti also said that to give the central bank more confidence, the federal funds rate must be higher than inflation until at least early next year, but he also didn’t think rates near 5 percent would last long.
Deutsche Bank has arguably the most pessimistic view on the economic outlook on Wall Street. The bank warned in April that the Fed’s aggressive rate hikes would lead to a recession in the U.S. next year, becoming one of the first major Wall Street banks to predict a U.S. recession, and Deutsche Bank managing director Tim Wessel even two months later. Warning that markets are underestimating the possibility of inflation rising or not falling fast enough.
Rabobank also joined Deutsche Bank on Friday in offering another take on the outlook for higher-than-expected interest rates.
Rabobank forecasts that the federal funds rate will peak at 5% next year, up from its previous forecast of 4.5%, under pressure from continued high inflation and a wage-price spiral, and it does not expect the Fed to rise until 2024. will change attitudes towards interest rates.