Federal Reserve Chair Jerome Powell raised Wall Street’s hopes of the economy heading for a “soft landing.”
A “soft landing” is a situation of slow economic growth, which doesn’t lead to a recession. Instead, it sets the economy up for another cyclical upturn.
In a speech to the Brookings Institute on Wednesday afternoon, Powell expressed the view that the nation’s central bank will slow the rate hikes to keep fighting inflation without pushing the economy into a recession. Thus, Wall Street’s hopes for a soft landing or a Goldilocks economy — an economy not too hot to perpetuate inflation and not too cold to slide into recession.
Bond and equity markets love soft landing scenarios.
Bond markets see soft-landing paving the way for higher bond prices and lower yields, as lower inflation diminishes the premium investors demand in holding long-term debt. Thus, the rally in the debt market Wednesday following the Fed Chair’s speech.
Equity markets see soft-landing positives for equity prices in two ways. First, slower inflation lowers the opportunity cost of holding equities, especially shares of nonprofitable companies.
Second, steady economic growth helps companies maintain and expand corporate earnings. Thus, the robust rally was seen in major equity indexes on Wednesday afternoon.
Michael Collins, a professor of financial planning at Endicott College, noted how Powell’s speech effectively communicated the Fed’s intentions and should help maintain confidence in the economy.
“Jerome Powell’s speech was reassuring to financial markets,” he told International Business Times in an email. “Powell demonstrated the Federal Reserve’s commitment to supporting economic expansion while being aware of the potential risks ahead. In addition, his statement that the Fed is not on a pre-set course and can adjust its policy if necessary is particularly encouraging.”
Kunal Sawhney, CEO of equity research firm Kalkine Group, said Powell’s remarks on equities were positive for the markets.
“This is good news for the markets as they have been waiting to get clarity on the extent and terms of Fed tightening,” Sawhney told IBT. “Tech stocks like Nvidia, Microsoft, and Apple jumped substantially, and other indices also gave a thumbs up.”
Sawhney shared some skepticism about the magnitude of the rate hikes in the future.
“Fed officials seem divided on this as some of them are of the view that fighting inflation is the key target,” he said. “A senior official even said that he sees interest rates heading somewhat higher than he had forecast just a couple of months ago.”
Joseph Peteul, the chief operations officer at investing and fintech firm Cap8, questioned the Fed’s ability to engineer a soft landing altogether.
“Though it would be a first in the 100+ years of history of the Fed and the many crises it had to face, today Chair Powell described the possibility of a soft landing as very plausible,” Peteul told IBT. “Our take is that it is still too early to say and that it would be the first time the Fed has been able to achieve a soft landing. So the highest probability scenario remains a mild recession — a soft-ish landing.”