Can the Fed Stick the Landing?

Weekly Market Update | July 11, 2022

Highlights

The global equity market has risen in two of the last three weeks with the MSCI World Index climbing 1.6% last week. In the United States, the tech-heavy NASDAQ surged 4.6% while the S&P 500 gained 1.9%. Technology stocks have been more stable of late as the U.S. 10-year real U.S. Treasury yield has also stabilized. Non-U.S. markets posted positive returns as well with Japanese stocks jumping 1.8% while European stocks eked out just a 0.3% gain as investors digested the potential closure of the Nord Stream II pipeline. Emerging market stocks rose 0.9%.

Some investors are saying that the U.S. economy is already in a recession with real gross domestic product (GDP) already shrinking 1.6% in the first quarter of 2022 and the Atlanta Fed’s GDP now tracker suggesting a 1.2% contraction in the second quarter of 2022. Yet, the Federal Reserve stated in their minutes that they believed that second quarter growth was rebounding at a moderate pace. One side will be wrong.

Traditionally, two quarters of negative economic growth are thought to be consistent with recession. However, in the 2001 recession, the U.S. economy never experienced two consecutive quarters of decline. During the Global Financial Crisis, it was determined that the economy entered a recession in December 2007, but the economy did not experience two consecutive quarters of contraction until the fourth quarter of 2008. In both periods, consecutive monthly job losses were the better metric in terms of calling a U.S. recession.

Leading economic indicators and the lesser-known Sahm Recession Rule suggest that a U.S. recession is still more likely in 2023 than in 2022. This gives the Fed a narrow window of time to still “stick the landing” where inflation comes down without a recession, but it will require a skillful composition to get the timing right with monetary policy often operating with a notable lag.