This week, Deutsche Bank economists said the Fed will create more inflation in 2024, and its analysts** The Fed will cut interest rates by 175 basis points in 2024 in response"Mild"A recession, if this happens, then the Fed rate will be expected to fall to 35% to 375% range.
According to the prevailing economic definition, such an accommodative monetary policy is bound to bring more inflation to the global economic environment, as the Fed's interest rate is currently set at 525% to 5Between 5%, we see that even in such a high interest rate environment, the problem of high inflation in many countries is still difficult, which also proves how rigid the current high inflation is, and most mainstream analysts currently believe that the Fed will cut interest rates next year, but not as much as Deutsche Bank economists.
The prevailing view is that the Fed has succeeded in keeping prices in check**. A lower-than-expected October CPI report reinforced this view.Inflation is indeed moving lower compared to previous highs, which is why mainstream analysts believe that the Fed has started its last interest rate hike and will inevitably turn to rate cuts next year to guide the economy"Soft landing"。
Even before the CPI data was released, markets were pricing in a 75bp rate cut in 2024.
An important manifestation that should not be ignored is that many mainstream analysts and pundits have ruled out a recession entirely, but Deutsche Bank senior U.S. economist Brett Ryan expects the U.S. economy to fall into"Weak periods", which will lead to:"More aggressive cuts"。
First of all, the death of inflation is greatly exaggerated. No matter how you slice the data, none of the numbers came close to the Fed's 2% target, and the core consumption** index remained twice that number.
"Mild"A recession will put additional downward pressure on price inflation, but he expects the Fed to follow the monetary policy of inflation.A rate cut would ease financial conditions, allowing for more money creation and credit expansion,** a symptom of monetary inflation, which is the result of central banks resuming accommodative monetary policy.
As soon as the Fed declares victory and starts cutting interest rates, inflation wins, and the Fed goes back to the inflation policy that has put us in trouble.Equally important, even if the interest rate reaches 55%, monetary conditions are not tight. This is confirmed by the Chicago Fed's Index of Financial Conditions. As of Nov. 17, the index was -047。Any negative number indicates loose financial conditions. Therefore, despite the Fed's tightening policy, it is still pursuing a monetary policy of slight inflation.
Deutsche Bank expects the Fed to ease policy further next year, but we should believe that inflationary pressures will ease.Second, while a recession can dampen demand and cause a partial** decline, the recession itself can also bring inflationary pressures, especially when the Fed cuts interest rates, which come in the form of a weaker dollar.
Over the past year or so, a stronger dollar has helped the Fed complete its fight against inflation. As the US dollar appreciated, commodities*** pushed the CPI lower.The results achieved in measuring inflation are due to the strengthening of the dollar. But the problem is that once the Fed declares victory, or even the market thinks the Fed wins, even after the Fed actually declares it"Mission accomplished"Before that, the market started to short the US dollar. The dollar starts to ** and will continue as long as the market thinks the Fed has won**.
It is precisely when they think the Fed is losing that they want the dollar, because it means that the Fed will fight harder and will have to raise interest rates. But if the battle is over and the Fed wins, then there will be no more rate hikes. "Finally, the looming recession will not be"Mild", in fact, what people expect"Soft landing"It's impossible. Because people think that the Fed can raise interest rates from 0 to more than 5% and not tip the economy into a recession?
If you look at the recent experience of the Fed raising interest rates too low and then raising them again, why is this happening?Go back to the late 90s of the 20th century, the 2000-2001 economic downturn, recession, ** and look at the experience of 2008. Look again at what happened before covid in 2018, when the Fed tried to raise interest rates from low levels, but had to abort quickly when the wheels started falling off the bus in the fourth quarter of that year. "History has clearly shown that it will be difficult for the Fed to normalize interest rates. In fact, in 2007 the Fed tried to raise interest rates from around 1% to just over 5%, which led to the worst recession since the Great Depression.
So why would anyone believe that the Fed can now normalize interest rates without similar consequences?Because, after all, raising interest rates exposes all the inappropriate investments and misallocation of resources that occur when interest rates are artificially low.
Deutsche Bank's **is not as optimistic as most mainstream**, and Deutsche Bank's economists at least recognize that a recession is coming. They are likely to be right to believe that the Fed will cut interest rates next year or any time the bubble bursts.
But they are wrong to think that the recession will be short-lived and mild, and that there will be deflation. Quite the opposite. When the economy collapses, the Fed will lower interest rates, most likely back to zero, and the Fed will almost certainly restart QE.
That's inflation. So when you boil it all down to one point, Deutsche Bank's economists are unknowingly in** more inflation, not less. In fact, they are deciphering the secret of stagflation.
