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Economic Outlook: U.S. Teeters on the Brink of Recession as Inflation Persists

In a stark warning from Deutsche Bank strategists, the United States economy stands at the precipice of a potential recession within the coming year. The crux of the matter? Lingering, uncomfortably high inflation levels. In a recent analyst note, experts expressed greater confidence in the likelihood of a recession over the prospect of a “soft landing,” primarily due to the Federal Reserve’s assertive stance on interest rate hikes.

“Given that inflation peaked significantly above target, the Fed should err on the side of tightening too much, rather than too little,” cautioned the strategists, *”A U.S. recession remains more likely than not.”

While the possibility of a soft landing has not been entirely ruled out, Deutsche Bank insists that the Federal Reserve must “depress demand below potential” to bring inflation back in line with its 2% target.

Over the past year, Fed policymakers have aggressively raised interest rates, implementing a total of 11 rate hikes, all in an effort to combat soaring inflation. Astonishingly, interest rates skyrocketed from near-zero to surpass 5%, marking the most rapid tightening pace since the 1980s. The central bank has hinted at the possibility of further rate hikes in the current year, waiting for compelling evidence that high inflation is indeed retreating for good.

Deutsche Bank’s strategists have raised concerns about data that is expected to reveal greater economic strain in early 2024 as the effects of the tighter monetary policy start to take hold. This, however, contradicts the growing optimism among economists who believe that the U.S. might evade a recession this year.

Goldman Sachs economists recently revised their probability of a recession within the next 12 months downward from 20% to 15%, citing a cooling inflation trend and a surprisingly robust labor market.

Jan Hatzius, Chief Economist at Goldman Sachs, highlighted reasons for their optimism: “First, real disposable income looks set to reaccelerate in 2024 on the back of continued solid job growth and rising real wages. Second, we still strongly disagree with the notion that a growing drag from the ‘long and variable lags’ of monetary policy will push the economy toward recession.”

Furthermore, the Goldman economist expressed the belief that the Federal Reserve has concluded its interest rate hikes as unemployment rates rise, wage growth slows, and core inflation continues to stabilize.

It’s essential to note that Goldman Sachs’ outlook is notably more optimistic than several other forecasts, including a Bloomberg consensus that places the probability of a recession at 60%.

This assessment comes on the heels of a recent government report that showed the consumer price index, a comprehensive gauge of everyday goods’ prices, including gasoline, groceries, and rents, rose by a mere 0.2% in July. While prices did register a 3.2% annual increase, this marked the first acceleration in a year, underscoring the challenge of reining in high inflation.

Additionally, the report revealed a slower-than-expected decline in inflation across other sectors, despite the Fed’s aggressive tightening measures. Core prices, which exclude the more volatile elements of food and energy, increased by 0.2% monthly, equivalent to an annual surge of 4.7%—more than double the typical pre-pandemic levels.

As the U.S. economy stands at this precarious crossroads, economists, policymakers, and investors alike are closely monitoring the intricate dance between inflation and recession, with each data point and policy decision holding immense weight in shaping the nation’s economic future.

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