Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. INDUSTRY VOICES
March 19, 2019 01:00 AM

Commentary: Some hard facts about a soft landing for the U.S. economy

Thanos Bardas
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    The position taken by Federal Reserve Chairman Jerome Powell in his recent statement to the Senate Banking Committee was good news for the U.S. economy and financial markets. For those who remained concerned that the Fed was still inclined to tap the brakes by further tightening interest rates or by hastily reducing its balance sheet, the language from the Federal Open Market Committee's January statement and the chairman's recent testimony was encouraging.

    By reiterating that it has decided to pause its rate-hiking behavior for the time being and, by signaling an earlier balance sheet normalization at higher than historic levels, the Fed has taken major steps in a positive direction toward a soft landing for the U.S. economy. Historically, an economic soft landing — in which economic growth slows but a recession is averted or delayed — requires small doses of stimulus. With rates still low, a reduction in quantitative tightening may provide the Fed with just enough of a spark to modulate economic growth. The typical ramifications of such a policy change, such as improved credit spreads, stability in shorter-maturity interest rates, a steepening U.S. yield curve and a weakening U.S. dollar, should create a positive feedback loop that will help stabilize the nation's economic growth rate at a more modest level.

    Risks to a soft landing

    To be sure, with the recent change in the direction of fiscal policy, the possibility of a manageable slowdown in the U.S. economy has become more likely. As a result, we expect moderate U.S. growth in 2019 — around the 2% level. However, a soft landing has historically been very difficult to engineer, and we note that there are still some risks to this outcome. For example, although high employment rates often precede recessions, in the current environment lower labor force participation remains below the level achieved at the depths of the 1991 and 2001 recessions and thus provides room for continued improvement.

    One of the greatest threats to a soft landing remains the pace of the Fed's efforts to trim its balance sheet, bloated by years of securities purchases in the name of quantitative easing. The Fed has now signaled its intention to reduce quantitative-tightening activity and to normalize its balance sheet at substantially higher than historic levels. Should tapering take too long, its stimulative potential could be thwarted by an unintended "crowding out" effect, as other buyers must be found for the securities that the Fed might sell. This process could drain capital from the equity and corporate fixed-income markets, creating the kind of sell-off that we saw in the fourth quarter of 2018.

    In reality, the Fed can probably implement monetary policy effectively in the current economy, even with a balance sheet that is larger than it has been historically. As Mr. Powell explained to the senators, the Fed is justified in running with higher reserves based on higher regulatory demand for reserves from the banks, for example.

    Concerns beyond monetary policy

    There are several other factors, besides Fed policy, that may pose obstacles to a soft landing. One is lackluster capital spending growth. While the tax reform enacted in 2018 was expected to fuel an accelerated rate of capital investment, the complexity of the tax-code changes and uncertainty about trade policy likely prevented it. In fact, growth rates in capital spending have remained muted, and the ongoing lack of clarity on trade policy should keep corporate America cautious on this front. Corporate America will likely continue to await clarity on policy (trade, infrastructure, etc.) and a sustained uptick in productivity before appreciably ramping up capital spending. Thus, should economic conditions worsen — for example, further erosion in the already weak housing price appreciation rate — there would be no offsetting burst of capital spending.

    In fact, excessive corporate debt is another threat to a soft landing. A large share of the tax reform windfall was diverted toward record levels of corporate share repurchases. In an environment of near record low interest rates, corporations also incurred debt to fund buybacks — and did so at elevated equity prices. Corporate balance sheets have thus become weaker, even as the Fed has taken steps to make its own balance sheet stronger. The importance of delivering a soft landing is underscored by the abundance of BBB- rated debt that could slip to junk if borrowing cost were to rise aggressively.

    Finally, if the U.S. economy does achieve a soft landing, it will not be due to any help from other global economies. The European economies are continuing to experience weakness, no doubt exacerbated by uncertainties surrounding Brexit. And the performance of China's economy has been less-than-stellar, despite some government stimulus. This weakness — as well as continuing uncertainties over trade policies — means that demand for U.S. exports is not likely to bolster the U.S. economy if its growth decelerates.

    Recent Fed policy announcements are steering the U.S. economy toward a soft economic landing, as the data-driven approach of the current Fed helps it navigate what Mr. Powell calls "cross-currents and conflicting signals." Still, policymakers cannot assume that all the preconditions for a soft landing have been met or are completely within the Fed's control.

    Thanos Bardas is global co-head investment-grade fixed income at Neuberger Berman, Chicago. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.

    Related Articles
    Fed charts a more cautious course, expects to halt balance sheet reduction
    Fed's Powell confident in economy but risks persist
    European Central Bank injects more stimulus, slashes forecasts
    Fed leaves rates unchanged, says no hikes likely this year
    Asset transfers due to Brexit reach £1 trillion – EY survey
    Global bond markets all sounding the same alarm
    Recommended for You
    Matt Petersen
    Commentary: CITs in 403(b) plans — An idea whose time is past due
    Charles E.F. Millard
    Commentary: Finding common ground politically with ESG
    Jo Holden
    Commentary: Inflation looms large over investor sentiment
    OCIO, Anchor in Rough Seas
    Sponsored Content: OCIO, Anchor in Rough Seas

    Reader Poll

    May 23, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Crossroads: Politics, Inflation, & Bonds
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 23, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference