Can the Fed fight inflation, increase interest rates substantially without sending the economy into recession? Is a so-called soft landing for the economy possible? The odds are not good!
Unfortunately, in 12 major tightening cycles over the past six decades, a soft landing occurred only 3 times. The other nine times resulted in recessions. So, the odds are 1/3 against a soft landing. Not a great perspective.
We are far from certain that the FED can land this plane successfully. Instead it might come off the runway and into an economic contraction. All we do know at the moment is that the Fed says it is committed to this course of action. But many times before in history when the Fed was raising rates, the stock market dropped dramatically and the Fed ended up reversing course to support the stock market.
The market calls it the “Greenspan put” after former Fed Chairman Alan Greenspan’s policy of basically setting a floor under stock prices, below which they couldn’t fall.
The S&P 500 down roughly 20% from its January peak and the Nasdaq 30% from its November high. It looks like the Fed is not stepping in this time to rescue the markets. So how far will stock have to go down before the FED chickens out again?
Sven Franssen