Many years ago, I took a few flying lessons. Single, working, and enjoying bachelorhood, I wanted to expand my horizons and learn how to fly, or so I thought at the time.
At the end of one lesson, my instructor, Pierre, and I are making a final approach. Touch and goes, a procedure where you land, taxi for a minute and take back off, can wear you out and I was ready to call it the day. We were approaching the runway much too high, and Pierre instructed me lower the nose.
Our descent was still too shallow and he instructed me to lower the nose even more. “More, more”, he shouted in his French accent. He shouted for two reasons. One, to make sure I got the message. Two, because at that point you could barely hear the engine. As we descended all I could hear was the wind and feel the plane shaking. For a brief moment I thought of the children I wouldn’t have and the women I delayed asking out on a date.
As the numbers at the end of the runway started to get bigger, my mind flashed back to the movie, “Midway.” I felt like a dive bomber getting ready to drop his payload. The moment turned into some trepidation as the numbers got larger. “Do I pull up now?” I asked Pierre. “Not yet”, he said. A few seconds later I asked, “Now?” He said … “No.”
At that point, I knew I was going to die. Seconds later Pierre instructs me to pull up. We had, surprisingly, enough flare of the nose where we seemed to drop effortlessly and softly on to the runway.
I’ve spent twelve hours behind the stick. I learned that flying is something you have got to have a passion for or else the hours learning and the money spent are wasted.
Traders and investors may not be questioning Jerome Powell’s passion for piloting the economy, but they have been keeping their fingers crossed about a soft landing for the economy. According to financial education and news site Investopedia, a soft landing is defined as:
“A soft landing, in economics, is a cyclical slowdown in economic growth that avoids recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a severe downturn. Soft landing may also refer to a gradual, relatively painless slowdown in a particular industry or economic sector.”
Since the Biden administration took over in January 2021, the U.S. has seen a slowdown in the rate of change of economic growth. Analysis from the U.S. Bureau of Economic Analysis shows that since the first quarter 2021, the U.S. has had three out of ten quarters of growth in GDP exceeding six percent.
Growth in gross domestic product.
| Quarter | 2023 | 2022 | 2021 |
| Q1 | 2.0% | -1.6% | 6.3% |
| Q2 | 2.1% | -0.6% | 7.0% |
| Q3 | NA | 3.2% | 2.7% |
| Q4 | NA | 2.6% | 7.0% |
Concurrent with the decline in economic activity is the rise in the effective federal funds rate, the interest rate banks charge each other for borrowing reserves overnight.
Federal funds rate.
| Quarter | 2023 | 2022 | 2021 |
| Q1 | 4.83% | 0.33% | 0.06% |
| Q2 | 5.08% | 1.58% | 0.08% |
| Q3 | 3.08% | 0.06% | |
| Q4 | 4.33% | 0.07% | |
The Board of Governors of the Federal Reserve System influences this rate by modifying two of its monetary policy tools; the discount rate, which is the rate federal reserve banks charge member commercial banks when these banks go to the Fed for a loan, and the interest paid on reserve balances, the amounts member banks earn on deposits they hold either in their vaults or in the vault of a federal reserve bank.
To stop the increase in asset prices, the Federal Reserve wants to make the cost of borrowing money more expensive. The less money borrowed, the less economic activity leading hopefully to a reduction in inflation.
One way to determine if asset prices are moving in a downward direction is to determine if yields on U.S. Treasury securities are increasing. According to data from the Federal Reserve Bank of St. Louis, asset prices, specifically bond prices are falling. We know this because there is an inverse relationship between bond prices and bond yields. As bond yields increase, bond prices fall.
Bonds are securities; they are assets. Because the Federal Reserve’s goal is to reduce asset price inflation, based on their data they appear to be on track.
I view the soft-landing narrative as a fear pitch to put investors into products that will allegedly protect them from capital losses over some intermediate or long-term period. You will either have a gain at the end of the day or week or eat a loss.
Alton Drew
11 September 2023
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