Johann Lee in NerdWallet: Will the Fed Pilot the Economy into a Soft Landing?

In economics, a “soft landing” occurs when a central bank, like the U.S. Federal Reserve, raises interest rates to control inflation without causing a recession. This is currently the goal of the Fed after its aggressive campaign, comprising 11 rate raises in the past 18 months to tackle rapid price increases.

This pursuit of a gradual and measured approach has largely succeeded, as the Consumer Price Index (CPI) only increased by 3% in June – a significant improvement compared to the 9.1% annual increase in June 2022. During this period, the unemployment rate has remained below 4%, and the Gross Domestic Product (GDP) has maintained positive growth.

But does this signify that the economy is on track for a soft landing? The economic data for August might offer investors the necessary perspective to address this question. NerdWallet turned to Johann Lee, CFA, director of research at AlphaCore Wealth Advisory, to learn more. According to Lee, the markets are expecting moderate CPI growth of around 2.2%. However, if the inflation data comes in higher than expected, it could roil stocks and bonds.

“A hotter-than-consensus CPI report would potentially suggest higher bond yields, thus a selloff in bond markets,” Lee tells the publication, adding that it “could put pressure on equities as discount rates move higher.”

However, if the CPI data comes in at a lower figure, it could still create volatility if “investors digest the news as demand rapidly falling.”

In other words, the August CPI report may serve as a crucial gauge of whether a soft landing is on the horizon. If the CPI is excessively elevated, there might be a need to raise interest rates to control inflation. Conversely, if the CPI is too low, it could signal an impending recession. Investors will soon have more clarity when the data is officially released on August 10.

Click here to read the entire NerdWallet article.

 

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