There’s a lot of discussion out there about soft landing versus hard landing. It may not be anything meaningful to an average person, but what are they talking about?
The Federal Reserve has been trying to engineer a way to beat inflation – and their way of beating inflation, the only tool they have, is to constrain the financial condition.
To constrain financial condition means:
- Raising interest rates
- Making the financial system less liquid by taking money out of the system
- Making it more difficult to borrow
- It will cost us more to borrow
Basically, we will not feel as good about the economy due to lower economic growth of the country. That’s the idea or intent.
So, this is a self-imposed way of saying, let us not get too excited about the economy. Let’s calm it down, let’s put a wet blanket on it. It takes some precision and some time to do that because it’s not just a single factor. The economy, especially the U.S. economy, is a very complex system. However, the Fed only has one tool – raising interest rates. The saying goes, when you only have one tool and that tool is a hammer, everything looks like a nail. You cannot be very precise and you’re going to break a lot of things. When they talk about soft landing, they mean they are not intentionally engineering a recession or a depression. They could not possibly say that. The Fed is signaling to everybody that they are going to be careful and that they have enough room to do this.
We believe this time will not be a soft landing. Soft landing means they will be successful in controlling inflation without destroying the economy.
It will be a hard landing.
The hard landing simply means at the end of this, whatever environment we’re in, we will be in a recession. When that is, we cannot tell you. How bad it is, we cannot tell you. But we do not believe it will be hunky-dory and we’re moving on unscathed.
It is not going to happen that way, in our opinion, for numerous reasons. The distillation being: if you only have one tool and it is to continue to raise interest rates, you are trying to control inflation by slowing the economy, the economy will become be much slower than you realize. And so, our prediction is it will be a hard landing.
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