Not-so-soft landing

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Expectations for a soft landing went out the window following the latest FOMC meeting on Wednesday. The question, now, appears to be how hard of a hard landing will there be. Things couldn’t have been more hawkish with the Fed’s “dot plot” showing a benchmark interest rate of 4.4% by the end of this year, as well as a terminal rate of 4.6% in 2023 (up from 3.25% and 3.8%, respectively). Lower growth forecasts and higher inflation estimates were also included in the projections, with the unemployment rate going up to 4.4% and leading to job losses of more than 1M (assuming no change in the size of the U.S. workforce).

Transcript highlights: “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Fed Chair Jerome Powell declared. “Reducing inflation is likely to require a sustained period of below-trend growth and there will very likely be some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. We will keep at it until we’re confident the job is done.”

While a small relief rally took place after the Fed hiked rates by a whopping 75 basis points – instead of a colossal full percentage point – the sentiment did not last. The major stock averages closed the session down 1.7%, as the 10-year Treasury yield spiked 7 bps to 3.64% and the rate on the shorter-dated 2-year popped 15 bps to 4.11%. Things continued to be volatile the rest of the week, as investors fret over the state of the economy, with the Fed willing to tolerate a painful recession as a key trade-off to keep a lid on inflation.

Case in point: “The deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals. And, you know, that’s a good thing,” Powell continued. “For the longer term, what we need is supply and demand to get better aligned, so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again. And I think we – so we probably in the housing market have to go through a correction to get back to that place.”