The narrow path towards a soft landing probably does not exist

FOMC meeting, September 2023

Fed Chairman Jay Powell cannot be more clear. Rates are going to stay high for as long as possible. There is no plan for a pivot. And there is only a narrow path towards a soft landing. 

We all knew that. And yet it surprised the stock market. The NASDAQ is down more than 3% on the news.

If that’s all it takes to rattle risk assets then imagine the reaction when the US economy enters an actual recession.

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The narrow path towards a soft landing: probably does not exist

The takeaway

What the Federal Reserve is really signalling at the latest FOMC meeting is that they have no idea where the US economy is heading. 

Keeping rates where they are for longer until “something” happens seems to be the strategy. 

And the Fed is still trying to sell that the “something” will be a soft landing. But even they can’t manage to sell that convincingly.

Therefore given the market reaction to the press conference at the FOMC I believe the risk of a liquidity crisis is still high if the US economy enters a recession. 

Focus on your strengths

The Federal Reserve has three main levers they can pull to affect the financial markets and more broadly the economy: