CNBC: Deutsche Bank Sees Four Rate Cuts by January, Says the US Risks 'Zero Rates' if Trade War Escalates

Article by Yun Li in CNBC financial

Recent trade optimism sparked a rebound in stocks, but Deutsche Bank warned if there’s an escalation in the trade war, the U.S. could see a “mild recession” and interest rates falling to zero.

The bank said it now predicts cuts will take down the Federal Reserve’s key rate - which now ranges between 2% and 2.25% - by a full point over the next six months.

“We anticipate 25 [basis] point rate cuts at each of the September, October, December, and January policy meetings,” David Folkerts-Landau, group chief economist, said in a note to clients on Tuesday.

Folkerts-Landau also said he expects economic growth to fall to below 1.5% by mid-2020, assuming the trade tensions between the U.S. and China ease or maintain the status quo.

“If the conflict picks up, the U.S. risks zero rates and a mild recession,” Folkerts-Landau. “Some de-escalation recently on U.S.-China trade front, but no signs of a deal as yet.”

The Federal Reserve cut interest rates for the first time in more than a decade in July, citing trade uncertainties and muted inflation. The central bank is widely expected to cut another quarter point when the Federal Open Market Committee holds its two-day meeting starting Sept. 17.

“In the U.S., our economists have revised down their growth forecasts, largely as a result of trade uncertainty,” Folkerts-Landau said. “Manufacturing is contracting and there are cracks in the otherwise strong labor market.”

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