Soft Landing Perspective Boosts as Recession Fears Ease
Lael Brainard, Director of the National Economic Council, shared optimistic remarks on the broader runways for soft landings, citing recent data on Friday.
A "soft landing" refers to a scenario in which the economy maintains inflation levels without triggering a recession. Although this feat is challenging, at least according to most standards, the Federal Reserve has managed to accomplish it only once in the past 60 years. (Some studies imply that this is more commonly achievable.)
Brainard, formerly the global number two at the Fed, stopped short of stating an imminent recession was unlikely. Instead, she highlighted various indicators – such as declining inflation rates, rising real wages, falling interest rates, and an increasing labor force – as evidence that a soft landing is increasingly likely.
Brainard acknowledged the inherent risks, stating, "Of course, there's always risk. There's always risk. Now, we can identify geopolitical risks, and there can be other risks."
The Federal Reserve's significant change in tune occurred just a year ago, when many economists firmly believed a recession was inevitable.
"Most people don't consider the alternatives," said Brainard. "But evidently, the forecasters were quite clear a year ago that in many cases, substantial job losses and a recession would ensue, so that inflation would return to where it is now. It was quite close to a 100% probability today."
Stock Market Rallies
Wall Street is celebrating the Federal Reserve's signal that it may begin lowering interest rates as early as March. The Dow Jones Industrial Average surpassed 37,000 for the first time on Wednesday.
Brainard replied to the White House's perspective on the record-breaking Dow by stating that investors welcome the positive outlook presented by the Biden administration.
Brainard remarked, "Market participants view economic opportunities for the next year more positively. We certainly welcome that." She also noted that market rates and mortgage interest rates had decreased.
Nonetheless, Brainard conceded that more work remained to be done.
"We have plenty to do," she said. "There are still real challenges for Americans concerning affordability."
In emphasizing a soft landing and highlighting the Biden administration's approach to the economy, Brainard's comments underscore a growing optimism in the market. The Federal Reserve's measured approach to interest rates and monetary policy, leveraging historical lessons and contemporary considerations, serves as the backdrop for this potential window of opportunity for economic growth and stability.
Enrichment Data:
Different research and analyses imply that central banks commonly manage to engender a soft landing in the economy, characterized by a moderate deceleration in growth with controlled inflation reduction. The following are the essential findings from the sources:
- Moomoo Analysis:
- Central banks can effectively engineer a soft landing by gradually raising interest rates. By meticulously laying the groundwork with such policies, central banks can stabilize the economy, steering clear of a recession or substantial unemployment. Historical examples include the US Federal Reserve's successful soft landings in 1965, 1984, and 1995[1].
- Santander Report:
- Driven by sustained economic growth and controlled inflation, central banks have commenced the cycle of rate cuts. This subsequent event, often resulting in a soft landing, is characterized by a gradual fall in inflation without negatively impacting growth or causing a surge in unemployment[2].
- BlackRock Market Commentary:
- BlackRock attributes the Federal Reserve's successful achievement of a soft landing to a balance of contractionary monetary policies and supply-side influences, such as enhanced productivity and an expanding labor market. Despite these gains, emerging threats like international tariffs or strict immigration regulations could potentially weaken the growth trajectory[3].
- Goldman Sachs Research:
- A study conducted by Goldman Sachs revealed that in 70% of soft landing rate-cutting cycles, central banks throughout the G10 have ceased rate cuts for at least three months. This trend indicates the prudent approach of central banks, aiming to ensure economic stability during the soft landing[4].
- Barclays Global Economy Analysis:
- The analysis indicates that the US economy is on track for a self-contained soft landing, with inflation converging towards the central bank's 2% target. However, risks such as potential import tariffs from the new US administration could disrupt this economic soft landing[5].
These studies collectively suggest that central banks consistently manufacture soft landings by managing interest rates and monetary policies in harmony to preserve economic growth while curbing inflation.
