Please ensure that your seatbelt is securely fastened, your seat back and tray table are in the upright position, and your electronic devices are turned off or set to airplane mode. As 2023 gives way to 2024, we expect the year-long recession/soft landing debate to finally get resolved. Jay Powell and the Federal Open Market Committee (FOMC) pivoted from their hawkish tone at the December meeting, signaling 3 or more rate cuts in the coming year.
For those in the soft-landing camp, the shift in Fed policy comes just in time. The labor market and consumer spending remain resilient. Inflation, as measured by the Consumer Price Index, peaked at over 9% on a year-over-year basis in the summer of 2022 and is down by nearly two thirds to 3.1% as of the last reading. This is still above the Federal Reserve’s (the Fed) 2% target, but clearly headed in the right direction. It is also close enough for the Fed to loosen their monetary policy stance in hopes of achieving the elusive soft economic landing.
The last such soft landing came in 1994 when then Chair Allen Greenspan was able to raise the Fed funds rate to cool inflationary pressure and then lower the rate quick enough to keep the economy going for another 7+ years and earn him the “Maestro” nickname. As shown in the chart below, rate cutting cycles over the last 50+ years have almost always preceded an economic recession.
For those in the recession camp, a hard landing is almost unavoidable. As we noted through much of 2023, the aggressive rate hiking cycle may yet to be fully felt by the economy. The Leading Economic Index is a diffusion index composed of 10 different leading indicators and is still signaling economic contraction ahead. In fact, only 1 of the 10 data points – the stock market – indicates an expansion, the remaining 9 are currently suggesting an economic contraction is in the future.
With a Presidential election and various geopolitical tensions, 2024 is likely to be a bumpy ride regardless of which economic scenario plays out. For investors, it is best not to overreact to the economic or geopolitical backdrop. Recessions come and go and investors who are in it for the long haul should plan to stay invested through various economic conditions and cycles. Our best advice is to stay invested in broadly diversified portfolios with a focus on high quality securities. We do however advise keeping that seat belt on tight!
For those in the soft-landing camp, the shift in Fed policy comes just in time. The labor market and consumer spending remain resilient. Inflation, as measured by the Consumer Price Index, peaked at over 9% on a year-over-year basis in the summer of 2022 and is down by nearly two thirds to 3.1% as of the last reading. This is still above the Federal Reserve’s (the Fed) 2% target, but clearly headed in the right direction. It is also close enough for the Fed to loosen their monetary policy stance in hopes of achieving the elusive soft economic landing.
The last such soft landing came in 1994 when then Chair Allen Greenspan was able to raise the Fed funds rate to cool inflationary pressure and then lower the rate quick enough to keep the economy going for another 7+ years and earn him the “Maestro” nickname. As shown in the chart below, rate cutting cycles over the last 50+ years have almost always preceded an economic recession.
For those in the recession camp, a hard landing is almost unavoidable. As we noted through much of 2023, the aggressive rate hiking cycle may yet to be fully felt by the economy. The Leading Economic Index is a diffusion index composed of 10 different leading indicators and is still signaling economic contraction ahead. In fact, only 1 of the 10 data points – the stock market – indicates an expansion, the remaining 9 are currently suggesting an economic contraction is in the future.
With a Presidential election and various geopolitical tensions, 2024 is likely to be a bumpy ride regardless of which economic scenario plays out. For investors, it is best not to overreact to the economic or geopolitical backdrop. Recessions come and go and investors who are in it for the long haul should plan to stay invested through various economic conditions and cycles. Our best advice is to stay invested in broadly diversified portfolios with a focus on high quality securities. We do however advise keeping that seat belt on tight!
