Trending phrases can make it easier to communicate complex ideas with just a word or two. On the other hand, buzz phrases can blur the fine line between simple and simplistic, and actually make it harder for investors to navigate the financial markets.
Sometimes buzz words and phrases have unclear origins; other times, we know exactly who the culprit it. For instance, it’s no mystery how the “transitory” became a trending word in mid-2022; Federal Reserve Chairman Jerome Powell floated the idea that high U.S. inflation would be transitory, though he flipped his stance on this before the year was over.
Other buzz phrases of the past year are “hard landing” and “soft landing,” referring to the state of the economy when the Federal Reserve gets the federal funds rate up to its terminal rate in an effort to bring inflation down.
If a “hard landing” is a severe recession and a “soft landing” is a not-as-bad-as feared economy, then investors are apparently left with two unpleasant choices. Perhaps it’s not an either/or scenario, however, as another school of thought is gaining traction in the media: “no landing.”
In reality, there are infinite possible outcomes of quantitative tightening and most likely, the end result will be “hard” in some ways and “soft” in others. Still, the media wants to divide and then conquer us, so they’ve created the “no landing” scenario as a third possibility.
In a nutshell, “no landing” suggests that, even as the Fed raises interest rates and drains the money supply, America’s GDP can continue to increase gradually or at least stay flat. It’s a reassuring thought, but bear in mind that a concept doesn’t suddenly become true just because the media gave it a name.
Courtesy: Yahoo Finance
A number of indicators suggest that continued GDP growth is possible in 2023. U.S. retail sales are strong as people continue to shop despite elevated inflation, the labor market has been surprisingly resilient, and January’s payrolls data was particularly robust.
The other part of the “no landing” scenario is that inflation would remain elevated, or at least higher than the Fed’s 2% target. In other words, higher-than-2% inflation would just be accepted as normal and the populace would learn to accept that the economy’s pretty good but everything is going to be expensive now.
Whether there’s an inherent contradiction here is debatable. Critics of the “no landing” concept might question whether businesses can thrive if inflation remains above the Fed’s target for an extended period of time.
EY Parthenon chief economist Gregory Daco is among the critics, as he claims that the “no landing” concept “does not make any sense, because it essentially means the economy continues to expand, and it’s part of an ongoing business cycle and it’s not an event — it’s just ongoing growth.”
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Here’s the billion-dollar question that Daco raises: “Doesn’t that entail that the Fed will have to raise rates more, and doesn’t that increase the risk of a hard landing?” To that, one might argue that the Fed doesn’t have the resolve to stick to its purported 2% inflation target, and will back off of quantitative tightening and accept a higher inflation rate.
There is credence to the idea that people can adapt to a “new normal” fairly quickly. Consider how remote work became normalized in 2020 because of COVID-19, and the genie’s out of the bottle now so it’s difficult for employers to require a return to the office.
In a similar vein, Americans’ productivity growth expectations changed at the end of the 1960s. Previous generations expected annual GDP growth of more than 2%, but now 2% is considered normal and acceptable.
Thus, maybe a permanent inflation rate above 2% could simply become the accepted status quo. It certainly would be easier for the Fed to declare victory over inflation if it moves the goal posts.
In that scenario, the central bank could have its cake and eat it too: an inflation rate that’s “good enough” without foundational damage to the economy. It’s not necessarily an ideal solution, of course, since permanently higher inflation is problematic for every consumer.
But then, the well-being of the American consumer isn’t necessarily the Fed’s priority. So, maybe “no landing” is in the cards, after all, as the Fed may be on the lookout for a solution that doesn’t actually solve anything.
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