Control Panel: No landing for economy?

The Federal Reserve has been raising the fed funds rate since 2022. The debate among economists has been whether there will be a hard or soft landing for the economy. But what if the economy will grow from here and have no “landing” at all? After all, the real (inflation-adjusted) fed funds rate and 10 year Treasury yield are still negative. This is not yet a restrictive monetary policy.

Hard or Soft Landing? Some Economists See Neither if Growth Accelerates

Upturn would require higher interest rates to tame inflation

By Nick Timiraos, The Wall Street Journal, Feb. 12, 2023

Surprising strength in hiring and consumer spending last month, together with signs that demand for autos and housing might be stabilizing after a decline, now have some economists pointing to a third scenario that seemed improbable just a few weeks ago: an economic growth upturn. …

To be sure, many economists still expect a recession. Some say the Fed moved so fast to raise rates that the economy hasn’t had enough time to reveal the full effects. The last time it lifted rates to current levels, in early 2006, it took another 1½ years for labor markets to wobble…[end quote]

The “wobble” in the labor markets in 2007 was the increase in the unemployment rate that ultimately led to the 2008 financial crisis and Great Recession. Unemployed people were unable to pay their mortgages (many subprime) leading to the collapse of the mortgage market.

There is a lot of uncertainty in this article. Can the economy begin to grow without a recession? If so, will inflation increase, forcing the Federal Reserve to increase the fed funds rate even more?

Investors in interest-rate futures markets see a 90% chance that the Fed will lift rates above 5% by June, up from 45% a month ago, according to CME Group. They see a 45% chance that rates remain above that level through the end of the year, up from 3% one month ago. This is a very rapid change of market opinion.

Both the stock and bond markets have been buoyed in January 2023 by speculation that the Fed will not execute the plan that it has described repeatedly. This is similar to the sentiment that buoyed the August 2022 rally that failed after a speech by Jerome Powell.

The strong January 2023 stock and bond market rallies hesitated last week. Is this noise or the beginning of another down leg? It’s too soon to tell.

Stock indexes and internals fell slightly. Bond yields rose (bond prices fell). The Treasury yield curve became flatter as yields rose along all durations.

The Fear & Greed Index declined to Greed from the Extreme Greed of the previous week.

The USD and oil rose. Gold and copper fell. This may all be noise. Natgas may have bottomed. The fall in natgas prices this winter is stunning.

The METAR for next week is cloudy. There is no clear signal of market direction.