Fed's Hope of A Soft Landing Dashed

A month ago the Fed hoped to gently cool the US economy; Inflation, Interest Rates put bears in control

June 15, 2022
Fed's Hope of A Soft Landing Dashed

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On the eve of Fed meetings, which some analysts believe will result in an interest rate increase of 0.75 — the largest since 1994 — the possibility of a soft landing for the U.S. economy seems like a distant memory.

As BankerAdvisor reported nearly a month ago, the Federal Reserve was prepared to prioritize countering higher inflation by aggressively raising interest rates, even at the risk of recession. By cooling the economy, the Fed could direct the economy toward a soft landing that did not pull back spending to the degree that it increased unemployment, Two-Headed Monster of Inflation and Recession Emerges.

Banks were preparing for the worst, setting aside funds in case the economy slipped into recession and events such as increased loan defaults may ensue.

Then and Now

That was then. This is now. Stubbornly high inflation rates have helped place the NASDAQ and S&P 500 into a bear market, defined as a decline of at least 20% from their highs. The cryptocurrency market has cratered, and related companies like Coinbase have begun to announce layoffs.

Now, the possibility of sharper increases and a higher ultimate destination or “terminal rate” are emerging. The Wall Street Journal reported that interest-rate futures markets place an almost 89% probability that the Fed would life rates to around 4% or higher by June 2023. That was only a 1% probability a month ago.

Corporate profits, of course, suffer when rates increase as higher rates reduce the value of a companies future cash flows which are used in pricing models.

The prospect of a slow, gentle ride in which the Fed could slowly and safely deliver the US economy to a gentle cooling, now has turned into an exercise of triage to extinguish fires.

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