The current situation could be forcing the United States Federal Reserve to maintain its aggressiveness, despite the risk of a recession. Due to bank collapses, the probability of a “hard landing” has increased considerably. In other words, thanks to such resilient inflation, interest rates could reach the 5.25-5.75% range for this year. The increase in the cost of credit at these levels will surely have a significant effect on demand. Which could cause the demand/supply balance to be restored. However, youSuch a slowdown (as necessary as it is) rarely comes without pain.
The optimists are betting on a soft landing. In fact, during this bearish cycle, the rallies have been achieved thanks to this narrative. In other words, every time the data suggests the possibility of a soft landing, markets go higher. And, every time the data suggests the possibility of a hard landing, markets are down in disappointment.
What is a soft landing? In general terms, a “soft landing” (in our context here) is an economic slowdown strong enough to reduce inflation, but not strong enough to cause a recession.. Right now, it’s just an expectation. Among the different scenarios, this is the most favorable of all. And, in many ways, It is the aspiration that is driving the rises at the moment.
During a “soft landing,” output doesn’t drop much, unemployment doesn’t drop that much, and income doesn’t plummet much. If inflation does indeed settle at 2% a year with a soft landing, the Federal Reserve could return to stimulus sooner rather than later. Or, put another way, a turn in monetary policy could be just around the corner. Which would be very beneficial for the stock markets and very beneficial for risky assets like Bitcoin. This is quite a favorable scenario. It is not a surprise that the bulls are viewing this scenario as the most likely.
Of course, everything depends on progress in the fight against inflation. Indeed, inflation, since last June, has begun to drop. So, in theory, we’re looking at a soft landing in the works. After all, inflation is down. But, at the same time, output hasn’t fallen by much, unemployment hasn’t dropped that much, and income hasn’t plummeted much. AND that has served for the bulls to “demonstrate” the feasibility of a soft landing. This optimism, consequently, generates increases.
In many cases, markets are pathologically irrational. They see what they want to see. That is, they interpret the situation at their convenience. The curious thing is that in the world of markets delusion is as powerful as sanity. Rightly or wrongly, a rise is a rise. Narratives create expectations. And expectations move the markets. That cannot be denied. In times of volatility and uncertainty, prices fluctuate at the earliest opportunity. Markets are very sensitive to different narratives. At present, the great illusion of the optimists is a turn by the Federal Reserve. Anything that feeds this illusion is used as an excuse to arouse bullish enthusiasm.
Now, that coin has two sides. In other words, a soft landing is not the only possible scenario. There is also the possibility of a hard landing. It could be said that among all the scenarios this is among the most pessimistic scenarios. What do we need to get there? Inflation more resilient than anticipated.
When studying the inflation data, we realize that the items that have fallen the most are the most volatile items (energy, food,…). There are other items that, in fact, have increased in the same period. So, despite the fact that inflation has come down a lot, it is possible that very soon we will run into a wall. AND, suddenly, we have to continue raising rates to be able to break through that wall. With higher than anticipated rates, a hard landing is much more likely. That is to say, With rates close to 6%, eventually, production could drop considerably, unemployment could begin to decline, and income could begin to plummet.
An increase in labor costs, due to an extremely tight labor market, has increased prices in the service sector. The labor market is still quite overheated, spending is still quite high and inflation is still not improving in many areas. This is an bleak picture for soft landing advocates.. Especially since the Federal Reserve itself has repeatedly suggested that the market often falls for false expectations.
Bank collapses complicate the situation on several levels. On the one hand, the situation serves as a reason for banks and investors to become increasingly conservative. That means, In search of greater security, the players begin to accumulate more capital to avoid a liquidity problem. Due to this paralysis, the economy, consequently, can suffer a lot.
On the other hand, the bailouts to the banking system are nothing more than injections of liquidity. Which exerts inflationary pressures. In other words, bank collapses make the situation very complicated. And hiss inflation-fighting effects could be quite mixed. This impairs our predictive ability by increasing uncertainty.
You have to repeat it one more time. It all depends on inflation. If inflation stops falling at the desired rate, there will be no choice but to raise interest rates even more.. And, with such high rates, the blow to the economy will be harder. As simple as that. It all depends on inflation. And it all depends on the Federal Reserve not giving in to pressure. With recession or not. With pain or without pain. The US Federal Reserve has to do what it has to do (with the tools at its disposal) to restore price stability.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision. Point and end.
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