Is an economic soft landing still possible?
Morgan Stanley Wealth Management06/22/22
Summary: With the Federal Reserve’s recent 75-basis-point rate hike, the probability of recession has risen. How should investors prepare for what may come next?
On June 15, the Federal Reserve raised interest rates by 75 basis points, the biggest single increase since 1994—and signaled more big hikes to come—in its continued effort to tame the highest inflation the US has seen in 42 years.
Morgan Stanley’s Global Investment Committee (GIC) believes the Fed may have created more questions than answers, especially since it said previously that a rate hike of that size was “off the table.” While markets initially cheered the Fed’s announcement, recession risk is actually rising. Here’s what investors should know.
The Fed is dialing it up…
The Fed suggested there could be continued acceleration in policy-tightening, raising forecasts that the fed funds rate could rise to over 3% by year’s end and top out at 3.8%, well ahead of most economists’—and the Fed’s own—previous forecasts. Such aggressive positioning to slow the economy means greater risk of actually tipping it into a recession.
…just as inflation may be peaking
Further complicating the Fed’s efforts is emerging evidence that inflation may be peaking and the economy cooling on its own. While May’s consumer price index (CPI) showed the largest year-over-year increase since 1981 at 8.6%, recent producer price index (PPI) data, which measures wholesale prices of goods and services before they reach consumers, was better than expected on almost every score.1
In addition, price gains for goods are starting to decelerate as supply chains clear, inventories rebuild, and demand cools, as evidenced by weaker retail sales. Housing-related demand is also slowing. And, perhaps most compellingly, the Atlanta Fed is currently forecasting 0% quarter-over-quarter GDP growth for the second quarter, following negative growth in the first quarter.1
This all raises the question: Is a true economic “soft landing” still possible? According to the GIC, it is—but the possibility may now be slim. Still, it’s important to maintain perspective. Both the economy and markets have weathered this kind of turbulence before.
The takeaway for investors: Focus on diversification. Investment grade bonds, international stock funds, and small- and mid-cap stocks—especially in biotech, financials, energy, and industrials—may help round out portfolios.
The source of this Morgan Stanley article, Is an Economic Soft Landing Still Possible?, was originally published on June 22, 2022.
- Morgan Stanley Wealth Management Global Investment Committee, “Fed Up,” June 21, 2022
Morgan Stanley disclosures
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