๐Ÿ“ˆ TKer by Sam Ro

๐Ÿ“ˆ TKer by Sam Ro

The bullish 'goldilocks' soft landing scenario that everyone wants ๐Ÿ˜€

Data suggests we can get a recession-free end to the inflation crisis ๐Ÿ‘

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Sam Ro, CFA
Jan 12, 2023
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A plane approaches a runway at Jackson Hole Airport. (Source: Wikimedia Commons)

Measures of inflation continue to cool, even as key economic activity metrics hold up.

This is great news: It increases the likelihood the inflation crisis will come to an end without the economy having to spiral into a recession (i.e., the hard-landing scenario).

Yes, itโ€™s probably too early to declare outright victory. However, itโ€™s becoming increasingly clear that a recession isnโ€™t necessary to get prices under control.

Before we go through some charts, we should address the Federal Reserve, which has long made it explicitly clear that it was targeting the labor market in its effort to bring down inflation.

But as weโ€™ve emphasized on TKer, the Fedโ€™s ultimate goal isnโ€™t to hurt the economy. Its ultimate goal is to cool inflation. Using policy tools to slow the economy is just a means to achieve those ends. [For more on how we got here and what the Fed is doing about it, read โ€œThe complicated mess of the markets and economy, explained ๐Ÿงฉ.โ€œ]

So itโ€™s imprecise to suggest the Fed needs unemployment to rise to achieve its goals. If we get the โ€œGoldilocksโ€ scenario where inflation moves convincingly to the Fedโ€™s long-run 2% target even as economic data reflects growth, then the central bank can pull back on its hawkish monetary policy stance before it leads to too much demand destruction.

This outcome would be good news for everyone: Consumers and businesses should face easier financial conditions, which would be good for the economy. And with monetary policy no longer needing to be so restrictive, the Fed-sponsored market beatings could come to an end, which would be good news for investors.

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