"We no longer see the Fed achieving a soft landing," Deutsche Bank economists led by Matthew Luzzetti said in the analyst note. "Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession."
The analysis comes as the Fed takes a more hawkish approach to fight inflation, which is at the highest level since 1982. Policymakers raised rates by a quarter-percentage point in March, and have since signaled support for a faster, half-percentage point increase at their May meeting.
Traders are now pricing in more than an 80% chance of a hefty half-point rate jump when policymakers meet next month
"If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so," Chairman Jerome Powell said recently. "And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well."
Some economists believe the Fed waited too long to confront the burst in inflation, while others have expressed concerns that moving too quickly to stabilize prices risks triggering an economic recession. Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.
The Deutsche Bank economists said that a recession will be unavoidable as the Fed pumps the economic brakes, warning that price stability will only be "achieved through a restrictive monetary policy stance that meaningfully dents demand." They forecast a mild recession that will begin in the final quarter of next year and continue into the first quarter of 2024, with unemployment peaking above 5%.
It is the first major Wall Street firm to predict a downturn in the U.S.
Still, Powell has pushed back against concern that further tightening by the central bank will trigger a recession and has maintained optimism that the Fed can strike a delicate balance between taming inflation without crushing the economy.
"The probability of a recession in the next year is not particularly elevated," Powell told reporters during the Fed's March meeting, citing the strong labor market, solid payroll growth and strong business and household balance sheets. "All signs are that this is a strong economy, and one that will be able to flourish in the face of less accommodative monetary policy."
The Labor Department reported earlier this month that the consumer price index rose 7.9% in February from the previous year, marking the fastest increase since January 1982, when inflation hit 8.4%. The CPI, which measures a bevy of goods ranging from gasoline to health care, rose 0.8% from January.