That Soft Landing May Never Arrive
Will there be a soft economic landing? The Fed has been signaling that, if it hasn’t arrived yet, it does seem to be on the way. Eventually. Maybe.
And that might be the case, but as Scott Anderson, chief U.S. economist at BMO Economics wrote, “Wall Street isn’t waiting around to see how this movie turns out.”
The point is that the economy isn’t a thing that exists separate from the rest of life. It involves the decisions every person and institution makes and how they interact. This is the psychological aspect of recession creation. People can collectively will themselves into one. Looking ahead and seeing trouble, they become tighter on spending. Companies make less and control resources, including staff reductions. Before you know it, the country has the reception people expected.
Perception is a powerful thing, especially when people in large organizations with outsized influences on the economy decide to react according to what they forecast.
“We are rapidly moving from the era of the Goldilocks soft landing consensus on Wall Street toward splitting into two camps: the ‘no landing’ crowd and the ‘buckle your seatbelts, bumpy landing’ crowd,” Anderson added.
The part of Wall Street in the no-landing camp has focused on expectations of tax cuts and deregulation, Anderson thinks. “Forecasts of a stronger dollar, higher interest rates, and higher inflation just aren’t penetrating this gravy train to Nirvana,” he wrote.
The S&P 500, Dow Industrial Average, and Nasdaq all hit 52-week highs. The CBOE VIX index (the volatility index it’s often called) reached its lowest level since mid-July 2024. That part of the market seems confident.
But the Treasurys market is hardly happy. As bond prices drop, yields go up. The 10-year is up around 80 basis points since September even as the Fed has cut 75 basis points off the federal funds rate. The 10-year saw an additional hike after the election. “About two-thirds of the increase (50 basis points) has come from rising real yields as investors have grown more skeptical of the Fed’s Dot Plot rate guidance, while one-third or 30 basis points has come from rising inflation break-evens,” Anderson wrote. This starts sounding like higher interest rates in the future.
Although futures markets aren’t necessarily accurate about where the economy is going, according to CME FedWatch, the probability for the December Fed’s FOMC meeting is about a 62% chance of a quarter percentage point cut and not quite a three-quarter point cut by the end of 2025. And the trade-weighted dollar is up more than 5% since September, signs that markets think Trump will implement tariffs as he said. Even if he doesn’t, the actions investors and businesses take could create the same response as if he did.
And, as Anderson closes, the combination of rising interest rates and high tariffs could slow GDP growth and put corporate profits at risks. None of this is good news for CRE.