The Federal Reserve’s aggressive interest rate remedy has long been their plan to pull off a graceful descent into an economic downturn or, as they like it, a “soft landing.” A few months ago, Wall Street and investors scoffed at this idea as they began bracing for the worst. Now, a growing crowd is betting on the success of the Fed’s strategy.
An analysis by Goldman Sachs Group Inc. found that mutual and hedge funds managing roughly $4.8 trillion in assets have been putting money into stocks that stand to benefit from cooling inflation, falling interest rates, and the U.S. economy avoiding a recession.
With heavy shares in industrial, materials, and energy companies, the analysis proves that investors aren’t shying away from groups that tend to be sensitive to economic changes. These bets should pay off if the U.S. avoids a deep and prolonged downturn.
Recent data bolsters that chance as the labor market remains strong, with the unemployment rate clocking in at a historically low 3.6% last month, and consumer spending is up. There are signs that inflation is easing, with consumer prices rising 7.7% last month. Still a sharp clip, but the statistic is the smallest year-over-year gain since January.
Katie Nixon, chief investment officer for Northern Trust Wealth Management, wrote that it is more likely that the U.S. will be spared “the typical scar tissue of a steep economic downturn.” Although, Wall Street argues that we’re not out of the woods yet, and a deeper recession could be looming.
Federal Reserve Chair Jerome Powell stated that wages are still growing too quickly to permit inflation to return to the central bank’s 2% target. While the red-hot labor market has kept unemployment low, its effort to keep up with employee costs of living, groceries, etc., has proved to be a challenge in regulating the economy.
The Fed is poised to announce its final interest-rate decision of the year on Wednesday following the release of the Labor Department’s November reading for the consumer-price index. The central bank is widely expected to raise rates by another half a percentage point, marking its smallest rate increase since March.
However, stocks falling Friday and suffering weekly losses after data showed producer prices rose more than expected in November has some questioning the Fed’s plans to slow its interest-rate increases in 2023. Unfortunately, history is not on the side of the Fed, as data from the central banks shows the economy fell into recession nine of the past 12 times the Fed tightened monetary policy. 13th time the charm?
On the bright side, stocks are up significantly from their October lows. Analysts and economists at several firms are predicting the economy will be able to narrowly avoid a hard landing in 2023. Nonetheless, stubbornly strong inflation readings might have those hopeful for a soft landing hoping for a little longer.
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