Source: Finance Association
The Federal Reserve will announce interest rate decisions and the latest economic forecasts in the early hours of Thursday morning, Beijing time;
As interest rate increases come to an end, consideration of follow-up policies has become a factor that the market is paying more attention to;
Although the Federal Reserve is quite optimistic, in the history of the US economy, a “soft economic landing” itself is quite rare.
On Monday evening, Beijing time, Nick Timiraos (Nick Timiraos), a well-known macro journalist named “the microphone of the Federal Reserve,” published a slightly pessimistic discussion on the expectation of a “soft landing for the US economy.”
As we all know, with regard to the US Federal Reserve's interest rate decision this Wednesday (early Thursday morning, Beijing time), the market is now quite convinced that the policy interest rate will not change, but with regard to the trend of the US economy and inflation at the end of this year and the beginning of next year, it is currently still in a “step by step” state.
A soft economic landing is actually a rare event
A soft economic landing means that after the economic cycle has entered a downward phase, it has steadily fallen back to a moderate growth range, while at the same time not triggering large-scale deflation or unemployment. Generally speaking, when economic overheating triggers severe inflation, the austerity policies that follow will suppress aggregate social demand and trigger a slowdown in the economy. This process can be figuratively viewed as a “landing.”
In the article “Why a soft economic landing may be difficult to achieve”, Timiraus mentioned,According to the economics community, the US has achieved only one sustained economic soft landing since World War II in 1995.Alan Binder, who was the vice chairman of the Federal Reserve at the time, recalled, “At the time, we were very professional in guiding the economy.Other than that, we are also very lucky because nothing bad happened.”
In fact, on the eve of the 1990, 2001, and 2007 recession, many Wall Street economists claimed that “America was close to achieving a soft economic landing” (surely everyone knows what happened later).
What is very similar is that as inflation data falls and the labor market cools down this summer, Fed officials and markets are beginning to think that achieving a soft economic landing would be within reach. According to Timiraus statistics,In 2022 and 2023, the US financial media “Wall Street Journal” published 82 and 62 articles on the “soft landing of the economy,” respectively, in recent decades, second only to 1989 (123) and 1995 (93).
Antúlio Bomfim, former adviser to Federal Reserve Chairman Powell, stressed that there is a reason why a soft economic landing is very rare, because it really requires a lot of luck.
Timi Raus said,After raising interest rates to a 22-year high in the past year and a half, Fed officials are likely to keep policy interest rates unchanged this week, because they don't want to hurt the chances of achieving a soft economic landing. However, their goals are facing a quadruple threat.
What factors might be bad this time around?
Peter Berezin, the world's chief strategy analyst at BCA Research, said that the Fed may temporarily achieve a soft economic landing, but the probability that it will maintain that state is not high.Because when the economy is in a state where there is little or almost no idle time, anything that stimulates demand is likely to trigger inflation, and at the same time, any act that lowers demand may cause the unemployment rate to rise. Once this process begins, it is difficult to stop. Berezin's current expectation is that the US economy will fall into recession in the second half of next year.
Timiraus pointed out that in the current cycle, there are roughly the following four factors that may cause the Fed to miss the “soft landing target”:
1. The Fed has been tightening for too long:As the only successful case in recent decades, the Fed had just gone through a period of rapid interest rate hikes by 1995. As the policy interest rate reached 6% in February of that year, officials began to realize that they might have added too much, and then began cutting interest rates in July.
Of course, the US inflation rate was already around 2% back then, and now Fed officials are still trying to keep inflation down even further. Berezin said his biggest concern is that the Fed will “pause” on current high interest rates for too long.On the one hand, cutting interest rates just after raising interest rates may be seen as quite humiliating; on the other hand, the current Fed is also afraid to repeat the misjudgment of the economic situation two years ago.
From a more academic point of view, in order to avoid a recession during the period when inflation weakens, it is necessary to maintain the policy interest rate in a neutral interest rate position that “neither stimulates the economy nor suppresses the economy,” yet even Powell himself said that it is difficult to determine exactly where the neutral interest rate is.
2. The economy continues to overheat:After a brief decline last year, US consumer spending and business activity have begun to accelerate again. If this situation continues, the Fed will have to continue raising interest rates to suppress the economy.
Steven Blitz, chief US economist at GlobalData TS Lombard, said that from the perspective of the Federal Reserve, it would be troubling to see that the profits of non-financial listed companies did not weaken in the second quarter. If the profits of listed companies continue to rise, employment is unlikely to weaken further. Blitz said that the economy is a dynamic process that is constantly changing,The Fed may be able to figure out whether the current interest rate hike is too much or not enough by next year; there isn't much room left for them to achieve a soft landing.
3. Energy prices have risen again - stagnating:In a situation where demand continues to be curbed, the rise in inflation driven by a rebound in oil prices may trigger stagnation. This is also a situation the Fed does not want to see. After the Federal Reserve began cutting interest rates in 1990 and 2008, rising oil prices made the process of the US economy landing even more difficult.
Berezin said that although oil prices have risen above 90 US dollars during the year and nearly 30% in the past 3 months, they have not reached that point yet, but if oil prices rise above 100 US dollars, he will become more worried.
4. Financial market turmoil:Many analysts have pointed out that with the rapid rise in global borrowing costs in the short term and the lagging effect of this round of interest rate hikes in the past, it will all constitute a destabilizing factor in future financial markets. After the subprime mortgage crisis, the Fed maintained a “zero interest rate” policy for a long time, and the same was true after the pandemic. Therefore, the operations of some financial institutions are based on the assumption that policy interest rates will remain low for a long time.
Jamie Dimon, the most experienced head of the Wall Street banking community, warned last week that in the context of the Fed's downsizing, America's widening fiscal deficit (which ultimately requires financing from investors) would pose a risk. Both will test the ability of financial markets to absorb the supply of US Treasury bonds. Even when policy interest rates are not adjusted, fluctuations in treasury yields will affect interest rates on mortgage loans and corporate debt.
Damon emphasized that people have a false sense of security about these two things. Those who think that “today's consumers are strong” will bring about a booming environment for the next few years would be a huge mistake.