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The Fed wants a ‘soft landing’ for the economy. The market says get ready for a crash

The Federal Reserve is raising rates to combat inflation, but experts warn the central bank is walking a tightrope. A soft landing is better than a hard one, especially when it comes to the economy.

It’s the difference between turning the booming Biden years—even with 40-year-high inflation—into a sustainable trend, instigating a mild recession, or something even worse.

The Federal Reserve, the institution caught between a rock and a hard place, got even more bad news on Wednesday: Inflation remains an issue. Although the consumer price index saw a deceleration in April, consumer prices are still increasing at an 8.3% annual rate.

The Fed famously has a dual mandate to promote price stability and maximum employment, and the central bank has been forced to raise interest rates in hopes of bringing down what has proved to be persistent inflation.

The problem is that stocks are throwing a fit. The S&P 500 is now down nearly 18% year to date, and the tech-heavy Nasdaq is faring even worse, plummeting over 28% this year.

There are also growing signs that the housing market is beginning to feel the sting of soaring mortgage rates. And expectations for economic growth are falling too. The Conference Board now predicts the U.S. economy will grow by just 2.3% this year, less than half of what was seen in 2021.

Investment banks, former Fed officials, billionaire investors, and even your neighbor are all predicting economic doom ahead.

While unemployment remained near pre-pandemic lows in April (at 3.6%), the Fed could be stuck with the worst of both worlds if it doesn’t stick the landing. That would be growth halting during the coming recession, unemployment going back up, and inflation not even coming down. That’s the dreaded scenario that recalls the woes of the 1970s: stagflation.

Here’s what will play into just how hard or soft this landing is.

To raise, or not to raise: That is the question

Some experts argue that fighting inflation, which remains near a four-decade high, must come first.

“Fed officials must not become complacent. They’ve failed. They’re still failing. Fortunately, it is not too late to make things right by delivering price stability for the American people,” William Luther, an economist at the American Institute for Economic Research, told Fortune. “The Fed should continue raising its policy rate until the price level returns to its pre-pandemic trajectory.”

Others are concerned that fighting inflation will only lead the economy into a recession. Nancy Davis, the founder of Quadratic Capital Management, told Fortune Fed officials must walk a tightrope to ensure the best possible outcome for average Americans.

“If the Fed is too aggressive with its efforts to slow inflation, they might end up hurting the overall economy and the jobs market,” she said. “It is a fine balance for the Federal Reserve to prioritize its inflation mandate without hurting the economy.”

Other experts are more optimistic, arguing the Fed can still ensure a “soft landing” if it moves at a measured pace to reduce inflation.

“Consumer and business demand is still strong, and the Fed still has wiggle room to pull off a soft landing,” Callie Cox, a U.S. investment analyst at the multi-asset brokerage eToro, told Fortune. “But stocks and crypto may struggle to find a bottom until we see more evidence of the Fed’s control. This particular selloff could be closer to the bottom than the top. You just need to ride out the storm.”

soft-ish landing

Whether the Fed decides to continue aggressively raising rates to combat inflation or pauses to allow economic growth to rebound, the all-important dual mandate, which, again, is to ensure price stability and maximum employment, could be in trouble.

Maybe that’s why Fed Chair Jerome Powell hedged his language in May’s Federal Open Market Committee (FOMC) meeting last week, arguing the Fed sees a path to a “soft-ish” landing for the U.S. economy, despite warning signs from stocks and real estate.

For now, the Fed appears set to continue raising rates in June. And only time will tell if it is making the right choice.

“Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” Powell said at the May FOMC press conference. “The economy is strong and is well-positioned to handle tighter monetary policy.”

 

Given we in New Zealand are suffering the similar effects of stupid govt financial policies, I thought it helpful to see what they are saying about the US economy.

The parallels are very similar, with house prices on the downhill, inflation out of control, and financial markets in freefall.

I estimate there will be another 30 % fall before any correction occurs.

 

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5 COMMENTS

  1. When you remove the feedback mechanism of pain, you will develop bad habits that lead to the eventual destruction of your body. A crash, or a correction, in markets, in your body, in life is only natural. The communistic and socialistic nature of government in the last 60 years, and its attempt to remove economic failure from society, has only ensured that nature will whip back with a violent crack and re-establish the proper order. Bad decisions have repurcussions. The God of Copybook will have its say.

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The way we all feel about this useless government

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