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INVESTMENT STRATEGY QUARTERLY

Fed Air: Prepare for Landing

Eugenio J. Alemán, PhD, Chief Economist, Raymond James
Giampiero Fuentes, CFP®, Economist, Raymond James

Online searches for the word ‘recession’ are near what they
were during the Great Recession, and economists, big banks,
and news outlets are all fuelling global fears by ringing the The S&P 500 has been positive 71% of the time 12 months
following the first Fed rate hike.
recession bell. Surging global inflation, hawkish central
banks, supply chain struggles, a war between Ukraine and

Russia, and China’s zero-COVID policy are just some of the ENGINEERING A SOFT LANDING
Since 1965, the Federal Reserve has only been able to achieve a
many factors negatively affecting the global economic
soft landing on three occasions (1965, 1984, and 1994) out of
outlook, leading economists and institutions worldwide to eleven occurrences. However, it would be unfair to just blame the
lower their respective growth forecasts for 2022. Fed for the subsequent recessions, as in most instances there
were other factors that led to economic contractions. For
The combination of these issues has significantly impacted example, the last two recessions followed hiking cycles. However,
investors, who were left with no place to hide this year except in the former, the Fed helped to burst the housing bubble, while
within the commodities space, as both equity and fixed income the pandemic was the real culprit of the latter.
markets have experienced negative performance year-to-date.
The biggest question mark among investors remains whether Since they started to hike rates, the Fed has been successful in
Western systemic central banks will be able to achieve the famous having an impact, with long-term interest rates rising significantly
‘soft landing,’ ergo, slow economic growth enough to reduce and mortgage rates skyrocketing. With a 75 basis point hike in
inflation, but without tilting their economies into recession. June, the Fed changed its tone, taking a more assertive policy
However, this is by no stretch of the imagination an easy task to stance regarding its commitment to bring inflation down to the
achieve, as there are a multitude of factors that are not within any 2% target. Whilst not to the same order of magnitude, the ECB
central bank's control that could hinder efforts. and Bank of England are also tightening policy to address

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