What Are the Odds of a Soft Landing? April 1 Macro Tides

The following is an excerpt from the April 1 Macro Tides that discussed FOMC monetary policy and the prospects for accelerated rates hikes, tapering the Fed's balance sheet, the coming tightening in financial conditions, and the odds of the FOMC achieving a 'soft landing'. Subscribe to Macro Tides @MacroTides.com

In a March 22 speech to the NABE Chair Powell touted the Fed’s ability to engineer soft landings in the past. “Soft, or at least soft-ish landings, have been relatively common in U.S. monetary history.?In three episodes—in 1965, 1984, and 1994—the Fed raised the federal funds rate significantly in response to perceived overheating without precipitating a recession.”

Since 1947, there have been 11 recessions following increases in the federal funds rate. If the 3 instances of a soft landing are added, a recession has followed in 11 of the 14 rate hiking cycles since 1947, or 21.4%. This is why Chair Powell only discussed the 3 successes rather the whole track record. If a baseball team had a winning percentage of 22%, no one would dare say that winning was a relatively common occurrence.

The current economic environment is far more challenging than in 1965, 1984, or 1994. This suggests the odds of the FOMC engineering a soft landing is less than the historical record of 22%. Is investor’s confidence in the FOMC warranted? Investors ignored this statement by Powell. ““No one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context.” More selective hearing!

Equity investors believe the stock market has discounted the coming increase in rates, believes the FOMC will achieve a soft landing, and earnings growth won’t be impaired. Clearly, the bond market is discounting a different outcome than equity investors envision.

#fomc #stocks #gdp #yieldcurve

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?Jim Welsh

@JimWelshMacro

[email protected], MacroTides.com