I can think of at least two consumer-based industries (I am sure there are others) who spend a significant amount of time pondering the above question.
The first would be the toothbrush industry. When you think of the vast array of toothbrushes available, it can sometimes be overwhelming. Do you prefer one with soft, medium, or hard bristles? Do you prefer manual or electric? The next time you are at the grocery or drugstore, step back for a moment and think of all the brands and options that are fighting for space and consideration on your mental shelf.
The second would be the mattress industry. Do you sleep better on a mattress that is soft or hard? Think of all the commercials you see touting beds based on the latest technology about springs, memory foam and/or some miraculous numbering system. All of these are designed to help you get a good night’s sleep in today’s overstressed world. As most people spend 6 to 8 hours per day sleeping which is 1/4 to 1/3 of their life, this can be an incredibly important decision.
From an economic standpoint, the Federal Reserve Bank also has a distinct preference for soft over hard…landings that is. Right now, the Fed has created a narrative that they can raise interest rates aggressively to fight rising and persistent inflation without tipping the economy over into recession. Fed Chairman Jay Powell has said this over and over in public statements. His sentiments have been echoed by other Fed Governors across the country.
What does history tell us? As you can see in the chart below, since 1955, the Fed has embarked on 13 prior cycles of increasing interest rates to combat inflation. The yellow bars in the chart tell us that they have only been successful in creating a soft landing in 3 of those 13 campaigns. Not a very impressive batting average.
Rate hike cycles: recessions > soft landings
When we consider that the Fed, by their own admission, waited far too long to start raising interest rates and that they are significantly behind the curve, we tend to give a lower probability to whether the Fed can successfully engineer their goal of a soft landing.
The timeline to the next recession (please remember, there is always another one coming down the road) and which asset classes will perform well relative to others are very important considerations as we look to help you, our trusted friends and clients navigate the economic and investment landscape.
As we enter the midterm election season, you are going to hear a lot of talk about the fiscal and monetary stimulus that created these inflationary pressures. You will likely hear the terms hard or soft landing bantered about. We wanted you to have some economic data points as you are subjected to these discussions and debates. In this context, we also would prefer soft over hard. We shall see if the Fed is as successful as their rhetoric projects as we continue “Moving Life Forward”.
© 2022 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.