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Wednesday, June 19, 2024

The Art of the Soft Landing

by Calculated Risk on 6/19/2024 01:51:00 PM

Yesterday, Goldman Sachs Chief Economist Jan Hatzius wrote:
Last week's benign US inflation data reinforced our view that the Q1 spike was an aberration. Meanwhile, the labor market stands at a potential inflection point where a further softening in labor demand would hit actual jobs, not just open positions, and could therefore push up the unemployment rate more significantly. We thus continue to expect two Fed rate cuts this year (in September and December) ...
emphasis added
The "Art of the Soft Landing" requires that the Fed reduce rates quick enough to keep economic growth positive, and slow enough not to reignite inflation.  My view is a soft landing is achieved if growth stays positive, inflation returns to target, and the yield curve flattens or reverts to normal (long yields higher than short yields).

The good news is growth has stayed positive and inflation has moved closer to the 2% target.  However, the yield curve is still inverted, and we are not out of the woods yet.

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant MaturityHere is a graph of 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity from FRED since 1976.  

If Hatzius is correct that the reported pickup in Q1 inflation was an "aberration", it seems like the FOMC will cut rates soon (probably September).

Most market participants expect 2 rate cuts this year, with the first cut in September.