There’s a new entry to the hard-landing/soft-landing debate—no landing at all. Just don’t expect it to be good news for the stock market.
Recent headlines have remained focused on whether the Federal Reserve will be able to engineer a smooth slowdown in the economy as it attempts to tame inflation or be forced to engineer a recession to bring the consumer price index’s growth rate back to its 2% target. Yet a third option is possible, one where it never touches the ground at all.
In this ‘no-landing’ scenario, the economy continues its upward trajectory, but inflation refuses to be tamed. And it’s one that is looking increasingly likely. January’s payrolls data made the term “robust” feel like an understatement, while measures of strength in the services sector remain resilient. There are even signs of life in manufacturing and housing data, where once they looked to be caught in a downward spiral. Inflation has even been slowing, and together the combination of smaller price increases and a resilient economy has helped boost the
“Markets have been rallying this year as hopes of a soft (or no) landing have been building, specifically because inflation continues to come back down, despite the labor market’s resilience,” notes Independent Advisor Alliance’s Chief Investment Officer Chris Zaccarelli.
So what’s not to like about a scenario where Americans can find work in a bustling economy and the cost of living is slowly, backing off its highs? Plenty. That’s because more jobs mean Americans can keep spending, as evidenced by the latest retail sales figures, which shot higher in January. And that in turn, will keep prices high and rising at a time when inflation, which is still cooling but at a slower pace, is far ahead of the Fed’s 2% target and not falling as quickly as the central bank would like and forcing it to keep raising rates.
Or, as BofA Global Research Investment Strategist Michael Hartnett pithily puts it: “No landing means no Fed pausing.”
Indeed, if “pivot” was the previous rallying cry of bulls, it’s looking increasingly contrary to a situation where the Fed has no incentive to halt, let alone unwind, its campaign of interest rate hikes. Deutsche Bank now expects U.S. Federal Reserve rates will top out at 5.6%, up from their previous 5.1% forecast. Money market futures aren’t far behind, suggesting a terminal rate of 5.3%, a swift rise from 4.8% as recently as the start of the month.
Even more optimistic economists are starting to worry about the possibility that rising prices remain sticky. Ed Yardeni, chief investment strategist at Yardeni Research, who continues to see a soft landing and a strong stock market, still sees the risks if inflation doesn’t continue its downward trend. “Fed officials likely would conclude that the only way to bring inflation down is by causing a recession,” he writes. “In other words, the inflationary no-landing scenario may turn out to be the long way to a hard landing.”
You don’t have to look too far back to see how the story ends. Last year’s bear market was a response to concerns about an ever-higher terminal Fed funds rate at the expense of economic growth. “Bottom line, a no landing would not be a sustainable positive because it just ultimately…delays, but does not avoid, the hard vs. soft landing debate,” writes Tom Essaye, founder of Sevens Report Research. “[The] Fed will keep raising rates until it feels confident that growth is slowing and that it won’t put upward pressure on inflation.”
Remember, there’s no fighting the Fed.
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