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The long and short of it: The case for a ‘softish’ US landing

The long and short of it: The case for a ‘softish’ US landing
Key takeaways
1
With the current battle between inflationary boom and deflationary bust, there’s lots of uncertainty in the US right now.
2
Some think the Federal Reserve (Fed) has waited too long with interest rate increases and a hard landing, resulting in recession is on the cards.
3
We believe a ‘softish’ landing is possible. There may be slow growth, but sustained jobs, income and consumption will mean it won’t necessarily feel like a recession.

Will the US economy hit the skids as the Federal Reserve (Fed) hikes rates aggressively to cut high inflation back down to size? The price action, a tug of war between inflationary boom vs. deflationary bust, reflects market uncertainty.

Some fear hard landing, for the Fed has waited too long with demand boosted by outsized stimulus amid COVID-led supply chain difficulties and wartime commodity supply problems. Others hope for soft landing, because inflation is cooling as the Fed tightens and more people re-engage with a strong jobs market, supporting household spending.

The historical track record reveals a 50/50 split between hard/soft-“softish” landings in a half-century of Fed hiking cycles. Markets behaved very differently – risk assets suffering severely in hard landings; performing well in soft landings; and somewhere in-between during softish landings.

We argue for a “softish” landing – growth may continue to slow and rebalance without it “feeling like” a recession because jobs, income and consumption hold up, as businesses, households and workers keep adjusting to side-effects of pandemic and war. In a softish landing, we would expect balanced portfolios to outperform risk-off, cash/bond heavy and risk-on, growth/tech heavy portfolios.

 

Figure 1. A 50/50 split between hard vs. soft/softish landings in five decades of US Fed hiking cycles

Change in the Real Economy Changes in Fed Policy Changes in Financial Markets  
Landing Change in Tightening Period Fed fund rate       Landing Category
Category Period Real GDP U-3 CPI Nominal Real Broad dollar 10yr UST S&P 500
Soft 11/66-07/67 1.90% 0.2 1.6 09/65-11/66 225 175 #N/A 0.23 12.20% Soft
Softish 12/69-11/70 -0.60% 2.4 5 07/67-08/69 600 540 #N/A 0.04 -10.70% Softish
Hard 11/73-03/75 -2.70% 3.8 15 02/72-07/74 1108 960 -2.4 0.75 -24.20% Hard
Hard 01/80-07/80 -2.20% 1.5 5.9 01/77-04/80 1562 1300 -0.8 -0.2 6.50% Hard
Hard 07/81-11/82 -2.10% 3.6 7.1 07/80-01/81 1253 1000 14.6 -3.48 4.40% Hard
Soft 08/84-02/85 1.80% -0.3 1.8 02/83-08/84 341 315 8.3 -1.52 15.90% Soft
Hard 07/90-03/91 -1.40% 1.3 3.3 03/88-04/89 313 325 -6.9 -0.3 3.50% Hard
Soft 04/95-04/96 4.00% -0.2 2.8 12/93-04/95 323 310 5.9 -0.92 30.60% Soft
Softish 03/01-11/01 -0.10% 1.2 0.8 01/99-07/100 279 190 2.9 -0.64 -12.70% Softish
Hard 12/07-06/09 -3.80% 4.5 1.6 06/04-06/06 400 425 4 -0.28 -36.30% Hard
Unique 02/20-04/20 -10.10% 11.2 -1.1 10/15-01/19 227 225 2.3 -0.88 -23.40% Unique

Source: Invesco adaptation from Professor Alan Blinder, former Fed Vice Chair, https://bcf.princeton.edu/events/alan-blinder-on-landings-hard-and-soft-the-fed-1965-2020/.1

Footnotes

  • Figure 1: Data show period performance: Real economy and financial markets for the landing period; Fed policy for the tightening period. U3 is a measure of US national unemployment based on those out of work but actively seeking employment as a proportion of the total pool of prime-age workers employed or seeking employment. U6 includes discouraged workers who have stopped seeking employment and are out of the labor force. CPI is US headline CPI inflation. Broad Dollar is the DXY nominal effective exchange rate index based on trade weights. 10-yr UST is the 10-year US Treasury bond yield.

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