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Banking & finance
OpinionComment
Chris Iggo
Chris Iggo

Macroscope | Will the US economy have a soft or hard landing? It’s still too soon to say

  • There is much contradictory evidence on whether the US will go into recession, and if so, when
  • For a recession to materialise, there would have to be worse corporate news and a higher unemployment rate

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Federal Reserve chair Jerome Powell testifies before the House Financial Services Committee on Capitol Hill on June 21. The Fed has skipped a rate rise but its battle against inflation is not over. Photo: AFP
Chris Iggo
Whether the US economy achieves a soft landing, falls into recession or sees some other outcome, it remains central to the global investment outlook. The United States Federal Reserve has not claimed victory over inflation yet, but it has paused its rate-hiking cycle on the assumption that its 500 basis points of tightening so far should have an effect on growth and price rises.
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Currently, economic data does not overwhelmingly point to recession. There is not a lot of bottom-up evidence. Markets can’t seem to make up their minds what to expect, even if some indicators suggest recession is nailed on. While fixed income remains the main attraction for many, equities keep going up – but of course, prices are vulnerable to any change in the narrative and the economic data flow. Investors should enjoy the summer if they can.

The Fed kept its key policy rate unchanged at 5 per cent on June 14, in line with most expectations. The decision has been described as a “hawkish skip”; Fed officials’ updated forecast suggests there could be more hikes to come. The view is that inflation risks remain, while the economy is more resilient than thought during the wave of bank failures.

Inflation coming down represents an increase in implied real interest rates. Put another way, market expectations for rate cuts have eased; rates are now expected to stay at, or slightly above, the current levels for an extended period. This makes sense, given that inflation is still well above the Fed’s target. Until the momentum of core inflation eases, the central bank is going to keep sending the message that monetary policy will need to remain tight for some time.

The debate on whether it will be a soft or hard landing for the US economy continues. Equity and credit markets are betting on the former. Looking at the macroeconomic, interest rate and credit outlook, one thing is clear: company fundamentals are solid.

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Strong nominal earnings growth has allowed leverage to come down and borrowers have been able to raise money comfortably in the bond market in recent months, building up cash buffers in case growth does weaken markedly. Unemployment remains low, consumer spending steady and, given the recent decision on the US debt ceiling, there is no shock coming from the fiscal side.
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