What Comes After the Soft Landing?
Whether the plane skids off the runway or bursts into flames, we definitely need a new metaphor
You may have read the news last week: the Fed started to cut rates, and we can drop the pointless debate over whether it should have begun with 25 or 50 basis points. Much more important now than how the Federal Open Market Committee starts rate cuts is the question of how they stop.
The debate over the soft landing itself seems increasingly pointless as we are pretty much wheels down right now. If I had told you two years ago when inflation peaked at 9.1% that we could get 2.5% with unemployment still at 4.2%, you would have accused me of magical thinking. At least, you would have pointed to the last dozen planes that landed from such a steep trajectory and only came to a stop in a crumpled heap.
Of course, there will inevitably be a few bumps yet before we come to a complete stop at our gate, and there will surely be complaints from First Class passengers who were distracted from the in-flight turbulence by free champagne and canapés. The rest of us in steerage will be grateful that the combination of repairing supply chains and moderating excess demand helped restore the cockpit readings to pre-pandemic levels.
But what now?
Pessimists would still have us holding tight to your armrests as they survey the continuing risks of a recession. Falling consumer sentiment and a softening job market have them worried that the plane may yet veer into a ditch. Indeed, the effects of such sharp Fed tightening since early 2022 can still deliver unpleasant surprises to overstretched banks, marginal real estate projects and ephemeral household demand.
These Cassandras will argue that faster rate cuts as demand collapses will do nothing to get the craft back on the runway as the Fed will be pushing on a string. The Federal budget debate under a new president and Congress may include more lower taxes and higher taxes to prime the engine but that will take time have much impact.
Then there are those who don’t believe that inflationary forces have fully dissipated. They worry the plane’s engine is still running hot and may just burst into flames even as growth slows. A variation of this fear is that the pilot may still not be able to slow the plane as it reaches the end of the runway, requiring a much firmer foot on the brakes that leaves passengers sprawling across the cabin.
But what seems more important now is to look beyond this phase of the cycle to the forces that will drive rates and growth higher or lower over the next few years. The latest Fed dot plot has the median Fed governor (and regional bank president) guessing rates will settle between 2.75 and 3.0% with growth at 2.0%.
There is much, however, that can move those estimates in either direction. Over the next year or two, we have a lot of spending on defense and health care that feels broadly supportive of growth, but also inflationary. There’s also a trade war that includes tariffs and a massive re-design of global supply chains. This feels inflationary, but not necessarily growth-enhancing.
The massive new investments in technology should boost growth, but the decimation of white-collar and clerical jobs that will come with the deployment of “artificial intelligence” could deliver a serious blow to final demand.
For now, feel grateful that your flight is ending about as well as you might have hoped and your plane will soon taxi gently from the runway to the gate, where you can relax and unbuckle your seat belts.
Until, that is, you hear a deafening explosion from that dormant volcano beneath the airport that can no longer suppress the roiling pressures from $33 trillion in government debt and blows everything to smithereens.
Our soft landing was all for naught and the hunt begins for a new metaphor. Magma pressures? Lava flows? Volcanic ash clouds?