Following the Federal Reserve’s recent 0.5-percentage-point interest rate reduction, many analysts predict a soft landing for the U.S. economy, characterized by decreasing inflation without entering a recession. The Consumer Price Index recorded a 2.5% increase for the 12 months ending in August, the smallest rise since February 2021. Similarly, the Fed’s preferred inflation gauge, the personal consumption expenditures price index, showed an identical increase over the 12 months through July. The Federal Reserve targets a 2% inflation rate.
Economic indicators reflect positive trends, with GDP growing by an annualized 3% in the second quarter, up from 1.4% in the first quarter. The Atlanta Fed’s GDP forecasting model anticipates a 2.9% expansion for the third quarter. Nevertheless, employment growth has decelerated, prompting the Federal Reserve to lower interest rates. Nonfarm payrolls increased by 142,000 last month, bringing the three-month average to 116,000, the lowest since mid-2020.
Experts, including former Fed Governor Daniel Tarullo, a professor at Harvard Law School, believe that these rate cuts make a soft landing “very plausible.” However, JP Morgan Chase CEO Jamie Dimon expresses skepticism, stating that while a soft landing is possible, its likelihood remains uncertain due to persistent inflation, which is still above pre-Covid levels. Dimon suggests that achieving a slightly higher inflation rate might be inevitable but manageable.
Economist David Rosenberg is more pessimistic, arguing that the Federal Reserve is experiencing “cognitive dissonance.” Rosenberg criticizes the 50-basis-point cut as a mere acknowledgment that previous policies were too restrictive. He contends that Chairman Jerome Powell’s optimistic projections conflict with concerns about labor market risks outweighing inflation risks.
On the other hand, JoAnne Feeney, a portfolio manager at Advisors Capital, maintains a more optimistic outlook. She notes the overall economy is performing well, with no immediate recession triggers. Feeney anticipates that multiple Fed rate cuts will positively impact the stock market, particularly benefiting value stocks and companies needing to borrow, such as small firms, biotechnology companies, and tech companies.
Rate cuts are expected to encourage consumer spending on travel, leisure, autos, and home appliances. Feeney forecasts that growth stocks will outperform value stocks, with sectors like technology, industrials, healthcare, and consumer discretionary poised to thrive, while consumer staples and utilities may underperform.
Further analysis indicates that lower rates could intensify consumer spending, consistent with historical trends observed when the Fed reduced rates during less favorable economic conditions.
