Crushing inflation could push unemployment to 6%, Wall Street bank warns

The economic cost of wrestling inflation under control could be much higher than the Federal Reserve is anticipating, according to Deutsche Bank analysts. 

While Fed policymakers are bracing for some job losses as they rapidly raise interest rates, the Deutsche Bank strategists said in a Monday analyst note that taming inflation will require "a lot higher unemployment rate" than the central bank's forecast of 4.4% next year.

As of September, the jobless rate stood at 3.5%, the lowest since the eve of the COVID-19 pandemic in February 2020. But as the Fed embarks on the fastest tightening campaign in decades, unemployment could climb as high as 6%, according to the Deutsche Bank forecast. 

In plain English, that could mean roughly 4 million Americans lose their jobs between now and the end of 2023. 

BILLIONAIRE DAVID RUBENSTEIN WARNS INFLATION WILL BE 'DIFFICULT' FOR THE FED TO REDUCE

"Our updated analysis continues to point to the need for a sharper rise in unemployment than embedded in the Fed's latest projections for September," Deutsche Bank analysts wrote in the note. 

Chairman Jerome Powell conceded during the Fed's post-meeting press conference in September that higher rates could "give rise to increases in unemployment." 

"We think we need to have softer labor market conditions," Powell told reporters in Washington. "And if we want to set ourselves up really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn't." 

Updated projections from the Fed's meeting showed unemployment rising to 4.4% by the end of next year, up from the current rate of 3.7%. That is significantly higher than June when policymakers saw the jobless rate inching up to 3.7%. 

FEDERAL RESERVE RAISES INTEREST RATES BY 75 BASIS POINTS FOR THIRD STRAIGHT MONTH

For months, the labor market has remained one of the few bright spots in the economy, with the economy adding more than 2 million jobs over the first half of the year. Additionally, the government reported earlier this month that job openings climbed past 11.2 million — meaning there are roughly two available jobs per worker.

However, there are signs that the labor market is starting to weaken, with a plethora of companies, including Alphabet's Google, Walmart, Apple, Meta and Microsoft, announcing hiring freezes or layoffs in recent weeks.

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.

Economists widely agree the risks of a recession climbed considerably this year and that avoiding a downturn in the near future will be increasingly difficult as the Fed tightens monetary policy. Powell himself seemingly acknowledged last week that a "soft landing," the sweet spot between curbing inflation without crushing growth, is looking increasingly unlikely. 

CLICK HERE TO READ MORE ON FOX BUSINESS

"The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer," Powell said. "Nonetheless, we’re committed to getting inflation back down to 2%. We think a failure to restore price stability would mean far greater pain."