Wither the Soft-Landing?
Recent stronger-than-expected U.S. economic growth was a top headline in the financial media, and a rare economic soft landing seemed like a sure thing. The major stock market indexes were within shouting distance of all-time highs, and with inflation trending lower, expectations had the Fed beginning an orderly easing of short-term interest rates as soon as September. Now, economic data released late last week casts doubt on the notion that the landing is, in fact, on track to be a soft one.
What happened? The July employment report raised alarm bells, with nonfarm payroll employment growth far below expectations. The jobless rate jumped to 4.3 percent, its highest since October 2021. The disappointing economic data collided with a stock-market that was running red-hot for more than a year and a half, leading to a downward reappraisal of earnings expectations and a substantial global selloff. At the same time concerns are growing that the Fed is behind the curve with respect to interest rates, as was the case when inflation was on the rise two years ago.
What Does It Mean? One disappointing jobs report does not necessarily portend an impending recession. A slowdown rather than a downturn remains the most likely path for the economy over the next six to twelve months.
It is unlikely, but not out of the question, that the Fed will lower interest rates prior to its next monetary policy meeting scheduled for September 17-18. It is very likely, though, that rate reductions starting in September will be larger and come at a faster pace than conventional wisdom previously held. According to CME Group data, financial markets are currently pricing in a cut of 50 basis points in September and a cumulative reduction of between 100 and 125 basis points by year-end.
The silver lining for households is that a steeper downward trajectory for interest rates will ease debt service burdens and help boost consumer spending on big-ticket items like autos. The touch of gray in the silver lining is that the smooth glide path to a soft landing looks like it will be quite turbulent.
August 5th, 2024
