Deutsche Bank: "To Control US Inflation, Base Interest Rate Must Rise to 5-6%"

Jerome Powell, Chair of the U.S. Federal Reserve (Fed)
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[Asia Economy Reporter Park Byung-hee] Deutsche Bank has diagnosed that the United States needs to raise its benchmark interest rate to 5-6% to curb inflation, which has soared to its highest level in 40 years.

According to Bloomberg on the 27th (local time), David Folkerts-Landau, Chief Economist at Deutsche Bank, stated in a report released that day, "Even with a conservative outlook, the US central bank, the Federal Reserve (Fed), will need to raise the benchmark interest rate to 5-6% to control inflation."

Deutsche Bank said that the 5-6% forecast takes into account that the Fed will accompany the rate hike with quantitative tightening (QT), which reduces the size of its asset holdings. Deutsche Bank estimates that QT will have the effect of raising the benchmark interest rate by about 0.25 percentage points twice.

Without quantitative tightening, this implies that the benchmark interest rate would need to be raised to 5.5-6.5%.

The Federal Open Market Committee (FOMC), the Fed's monetary policy meeting, will be held on July 3-4. The Fed is expected to raise the benchmark interest rate by 0.5 percentage points at this FOMC and announce a quantitative tightening plan to reduce its nearly $9 trillion in asset holdings.

Deutsche Bank estimated the US neutral interest rate to be around 5%. This is twice as high as the 2.5% level currently estimated by the Fed. The neutral interest rate refers to an appropriate level of interest rate that neither stimulates nor depresses the economy.

Deutsche Bank warned that the Fed's monetary tightening could cause significant turmoil in the financial markets and that the US economy could fall into a substantial recession in the latter half of next year.

It also forecasted that the US 10-year Treasury yield could rise to 4.5-5%. On that day, the US 10-year Treasury yield was recorded at 2.77%, nearly doubling from around 1.5% at the end of last year.

Deutsche Bank emphasized, "The faster and more aggressively the Fed acts, the less long-term damage there will be to the economy."

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