The world’s largest economy will become even larger as it powers through inflation with an outstanding economic performance.
At the beginning of the year, markets predicted a soft landing with 7 or 8 rate cuts in 2024. The Federal Reserve, however, not only likely achieved a soft landing with just one rate cut, it may result in no landing at all.
A “soft landing” is the economic condition whereby an economy, in this case the world’s largest, tightens monetary policy just enough to avoid recession. Tightening the monetary policy means raising interest rates, consequently decreasing the amount of liquidity in circulation.
High interest rates are needed to lower inflation, which peaked at 9.2% in the United States two years ago. Prices are now over 20% higher than before the COVID-19 pandemic.
However, a too-tight monetary policy may cause the economy to enter a recession. Achieving a “soft landing” is, therefore, extremely difficult and requires fine-tuning of literally millions of moving parts.
And yet, it seems the Federal Reserve achieved exactly that. Interest rates are lowering, inflation is down, but the economy is doing exceptionally well.
Last Friday, the Bureau of Labor Statistics released job market data for September, a crucial indicator to reveal the current state of the US economy. What the report found was not only that the US added 254,000 new jobs in September, which was 114,000 more than predicted, but also that unemployment is decreasing.
The blockbuster job report finally convinced markets there will not be a recession any time soon. “We hear about monetary policy being too restrictive. Based upon what?” Interactive Brokers chief strategist Steve Sosnick said at Yahoo! Finance’s Morning Brief. “We have stocks at all-time highs. We have bond yields basically at multi-year lows, even after this pullback recently. We have credit spreads very tight, meaning that corporations can borrow money if they need to. You have all kinds of risky assets doing well, you know, Bitcoin, etc. Where exactly is the restrictive monetary policy coming in?”
Sosnick added he expects a “no landing” situation, whereby the US already would have passed the worst effects from the monetary tightening.
GDP growth is expected to rise to 2.9% in the current quarter, matching the same performance as Q2.
The question if the Federal Reserve will cut rates one more time this year remains open. Fed Chairman Jerome Powell openly talked about another rate cut in 2024, although the job report may have changed the picture. It will more likely depend on September’s inflation data.
