The US is headed for a recession – forecasts

The U.S. is on track for its first genuine policy-led boom-bust cycle in four decades, induced by a significant increase in the money supply over 2020–21, unleashing high inflation and an aggressive policy response,” Deutsche Bank’s head of global economics and thematic research, Jim Reid, and chief economist, David Folkerts-Landau, wrote in a Monday research note. “The next stage is the U.S. recession that we were the first to forecast early last year.”

For more than a decade after the Global Financial Crisis, Fed officials sought to boost economic growth by holding interest rates near zero and instituting a policy called quantitative easing (QE)—where they would buy government bonds and mortgage-backed securities in order to increase the money supply and spur lending and investment in the economy. When the pandemic hit, they doubled down on these so-called “easy money” policies to help prevent an economic disaster. But Reid and Folkerts-Landau argue that this move set the U.S. up for a disastrous spell of inflation and a boom-bust cycle.

The easy money policies of the Fed, along with broken supply chains and stimulus programs, helped exacerbate the rise of inflation in 2021, according to Deutsche Bank, and forced Fed officials to raise interest rates from near zero to a range between 5% and 5.25% over the past 15 months. Reid and Folkerts-Landau argue that consumers and businesses are struggling to cope with the rising borrowing costs that have come with these aggressive rate hikes.

“After 10–15 years of zero/negative rates and near continuous QE, businesses, consumers and investors are a long way from fully adjusting to the recent rate shock,” they wrote, arguing more financial “accidents” like what happened with U.S. regional banks in March, when Silicon Valley Bank and several others collapsed, “remain a big risk” as interest rates rise.

The pair explained that another financial accident would lead to a further reduction in lending and crush the “animal spirits” of investors that have been lifted by A.I. of late, thereby accelerating a recession and market downturn. The renowned British economist John Maynard Keynes coined the term “animal spirits” in 1936 to describe how investors and consumers are often driven by emotion rather than logic, particularly in the near term, which can lead them to be spooked by bad economic data.