Soft Selling a Hard Landing

"The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation, and the full effects of our tightening have yet to be felt. The staff did not put a recession back in. I mean it would be hard to see how you would do that if you look at the activity we’ve seen recently, which is not really indicative of a recession in the near term. The Committee is not thinking about rate cuts right now at all," Jerome Powell, Federal Reserve Chair, November 1, 2023.

For the better part of two years, investors have been primed with hope of a “Fed pivot” that will presumably restore easy monetary policy and supportive conditions for the financial markets. If anything characterized the first half of November, it was the reflexive release of pent-up “PIVOT!!!!” jubilation, on the belief that the Federal Reserve is finished with rate increases, and that the economy will enjoy a “soft landing.” My impression is that this belief led to a sudden “fear of missing out” (FOMO) and eagerness to get in front of a “Goldilocks” scenario combining continued economic growth with eventual Fed easing.

The S&P 500, Nasdaq 100, and even the Russell 2000 responded with what we often call a “fast, furious, prone-to-failure” clearing rally, eliminating the short-term oversold conditions of late-October by moving from the bottom to the top of their respective Bollinger bands (from -2 to +2 standard deviations around their 20-day averages).

Wall Street Journal

From the standpoint of systematic monetary policy, the Federal Funds rate remains below, not above, levels that have historically been consistent with prevailing core inflation, output, employment, and sales. Still, we’re close enough to systematic benchmarks that pausing further rate hikes is reasonable here. That’s particularly true given that the Fed has drowned the banking system with trillions of dollars of excess, uninsured deposits. As I noted in Fabricated Fairy Tales and Section 2A and Money, Banking, and Markets – Connecting the Dots, the Federal Reserve’s balance sheet remains deranged from the standpoint of systematic policy and the 2A mandate of the Federal Reserve Act.