The Fed Can’t Figure Out if it’s an End or The Beginning…
Mentions of the phrase “Soft Landing” have been rampant in the media the last few weeks. If the Federal Reserve has, in fact, navigated the difficulties of fighting inflation without causing a recession, we will applaud them, as very few times in history has this truly been achieved.
Policy makers and central bankers alike have a long history of overshooting before inflection points. We believe this time is likely the same, but last week when we heard Minnesota Federal Reserve President Neel Kashkari talking about this possibility it was tough to ignore.
If we were trying to bolster their point, certainly the stock market has been encouraging in the aggregate, and employment data would suggest that things are GREAT. Inflation is still way above target, but it has been slowly getting better (ex-energy).
But what about manufacturing? Last week, the Institute for Supply Management (ISM) put out their Manufacturing Purchasing Managers Index (PMI) numbers. In most cases, economists look at the index relative to 50%. Anything above 50% means that market conditions are expanding, anything below means that conditions are contracting. The July print of 46.4% is not exactly a great number, but it has been stable over the last several months.
Markets deal very well with stability, and frankly, after the volatility of the last several years, it’s a welcome sight. More importantly, however, the most recent uptick dovetails well with the improving stock market and increasing breadth of participation.
As a reader of Wind In the Willows, you likely know we’re skeptical of this call, but we continue to monitor data and consider it in the broader economic context.