The US appears headed for a hard landing and a recession, according to the chief economist at one of Europe’s biggest banks.
Deutsche Bank’s David Folkerts-Landau says a recession is the highly likely cost of the Federal Reserve’s rapid sequence of interest rate hikes, even if it achieves the desired outcome of lower inflation, reports USA Today.
“The U.S. is heading for its first genuine policy-led boom-bust cycle in at least four decades…
The inflation we see was induced largely by expansive fiscal and monetary policy, and the aggressive rate hikes needed to tame that have now materialized. Avoiding a hard landing would be historically unprecedented.”
Folkerts-Landau’s team says that the Fed will probably create a further drop in inflation, and then a recession that will prompt them to cut rates by March 2024. The analysts expect the Fed to cut rates in the same aggressive manner that they raised them over the last year and a half, likely “in 50-basis-point to 75-basis-point increments until reaching 2.625%.”
The Deutsche Bank analysts said artificial intelligence (AI) could, later in the decade, be the one source of growth for the US in otherwise stagnant economic conditions.
“Given a poor cyclical outlook, low productivity, and declining demographics, we are in desperate need of a new source of growth…”
According to legendary investor Stanley Druckenmiller, AI could continue to outperform the rest of the stock market if the companies involved can show signs of sustained growth in a recessionary environment.
“I do believe, unlike crypto, I think AI is real. It could be as transformative as the Internet. It’s a huge thing.
I think I’ve argued publicly that if [consumer] staples can go up in price in a recession, why can’t a company like Nvidia go up if their orders and earnings go up 70% in a hard landing, which is what I think would probably happen. It’s not clear that me that Nvidia goes down despite the lofty valuation level.
History has proved if you have very good earnings in a recession and they’re sustainable – if they’re not the market somehow figures it out –those stocks will do just fine.”
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