Investors hope for a Goldilocks-style soft landing, but the proof will be in the Fed’s porridge
Ignoring the (three) bears… The economy ≠ the stock market, but markets rallied last week after GDP #s showed the US economy grew an expectation-beating 2.9% in the final quarter of last year. The icing on the cake: the pace of growth slowed slightly from the previous quarter, suggesting the Fed's hikes are gently cooling the economy rather than freezing it. That’s reviving hopes for a Goldilocks-like "soft landing." The ingredients:
- Not too hot: Temp jobs fell for the fifth straight month, raising hopes that the labor market could cool without erasing many full-time roles. But fresh layoff announcements from companies like IBM and Hasbro could change the picture.
- Not too cold: Inflation cooled again last month, ending the year at 6.5% (still way above the Fed's target). And while job growth is slowing, the labor market’s still historically strong.
Juuuust right… Experts say continued consumer spending, which rose 2.1% last quarter but ticked down last month, will be key to avoiding a recession. While consumers are starting to rein in their daily budgets, some are "revenge inflation spending" on major purchases. American Express’s CFO said spending on experiential splurges like travel is "off the charts." Still, while consumer sentiment has improved this year, it’s still near historic lows.
A fairy-tale ending isn’t guaranteed… While optimism is up, some experts say there's still plenty of room for concern (and a Q3 recession). The Fed, which meets tomorrow and Wednesday, is expected to continue raising rates over the next two months — though at a slower pace than those past “jumbo” hikes. Fed officials said they don't expect to cut rates this year, but analysts think cuts could come as soon as September. We’ll see whether Fed Chair Powell squashes the market’s optimism.