Is US economy heading towards a soft landing? Jahangir Aziz explains

If the banking stress is sufficient to slow down credit, bring down the labour market and bring down growth to a sustainable point, that will hint towards getting inflation down to more comfortable levels or not. The jury is out. Let us see how that works out, says Jahangir Aziz, Head-Emerging Market Economics, JP Morgan

Can I say that the Fed event last evening was more like a no event? Is it time to move on? . You should go to sleep and we should start a brand new day.
We shall see what the next non-farm payroll number looks like and what the next inflation print looks like. The Fed move was almost entirely in line with expectations. The separation principle between monetary policy directed towards inflation and other tools directed towards the banking sector, liquidity support that was clarified. The fact that they did not change the dots for 2023 was essentially a balancing between the very much stronger data that has come out so far this year versus the likely credit crunch that we will be seeing going forward because of the banking sector stress.

The language that they used to say that instead of on-going increases, they are going to move to some additional increases suggests that probably there is one more hike left at least and we believe that another 25 bps hike in June is likely and that is about it for the time being.


Having said that, ultimately it will depend upon how the US economy delivers in the next few months and that is where the concern will be. If the banking stress is sufficient to slow down credit, bring down the labour market and bring down growth to a sustainable point, that will hint towards getting inflation down to more comfortable levels or not. The jury is out. Let us see how that works out.

When the Fed is indicating that they expect the US economy to head towards a soft landing, is it realistic?
I would say there is about 50% odds for a soft landing scenario. That soft landing scenario includes soft landing in the traditional term or a muddled through environment. But there is a concern and that has been the sort of thing that you and I would be talking about if it was not for the banking sector events that happened over the last two weeks.

There was a strong sense that 5% was not enough or something even close to 6% was not going to be enough and that the economy required much stronger rate hikes to bring about sufficient slowdown into the economy. Now, the probability of that has gone down simply because the banking sector stress is now saying that the credit crunch because of the banking sector stress will lead to some of heavy lifting for the Fed and therefore the Fed does not need to go down that route.

But that probability is still around 30% as far as we can assess. It is not out of the woods. As I said, we would really like to see whether the credit slowdown is caused because consumers and corporates' loan demand is going down, that does not seem to be the case so far.

Let us see whether the supply side problems, which are essentially that the lending standards will be tightened from here onwards, delivers that. But we have to keep in mind that all these things – whether the monetary policy or banking sector credit– have significant lags with which they hit the economy. The probability that you do not need to retighten monetary policy may have gone down, but it is still material.