Federal Reserve Chairman Jerome Powell’s recent announcement that U.S. interest rates will hold steady at 5.25% to 5.5% has sparked a debate among investment professionals about what would be best for asset owners: a “soft landing” or a full-blown recession?
While Powell and other Fed officials have expressed optimism about GDP growth in 2023 and 2024, some industry experts are advocating for a more skeptical perspective, suggesting that a recession could bring more benefits for investors than the soft landing the Fed is striving for.
A recession—or even a “system crash,” as Han Dieperink, chief investment officer at Aureus Vermogensbeheer, puts it—would prompt central banks to cut interest rates. This rate-cutting environment, he said, would be more favorable for investors than a soft landing. Dieperink believes there’s a high likelihood of a U.S. recession occurring next year.
“The Federal Reserve’s dovish outlook doesn’t match the underlying statistics indicating financial stress among U.S. households,” said Dieperink. Household debt in the U.S. has surged to a historic high of $1.03 trillion, with record numbers of Americans defaulting on auto and credit card loans. Even as the average interest rate on unpaid credit card balances has reached an all-time high of 20.6%, household savings, bolstered by Covid relief funds, are dwindling fast.
Projections clash with reality
While Powell remains upbeat, stating that a soft landing isn’t his “base case” but a “primary objective”. While the Fed raised GDP growth forecasts for the next two years, skeptics like Dieperink suggest that these projections clash with the economic reality. Recent reports show that debt levels among American households have reached historic highs, accompanied by a 10-year peak in defaults on auto and credit card loans. With the average interest rate on unpaid credit card debts at an all-time high of 20.6%, these indicators have led investors like Dieperink to question the prevailing optimism.
The resumption of student loan repayments, affecting 45 million Americans from October 1, is another significant economic stressor. Payments are expected to account for approximately 1% of consumer spending, which, although not disastrous, can hardly be ignored either.
Han de Jong, former chief economist at ABN Amro, also sees a recession as a real concern for market participants. He pointed out that households used part of the “Covid money” from the government to pay off debts and save, which has now been depleted. “The savings rate has already been lower than before the pandemic for some time, and it’s questionable whether that’s sustainable,” he said.
ING’s economics department has likewise voiced concerns. Despite the U.S. exceeding expectations, Bert Colijn, a senior economist, finds it “difficult to ignore signs of weakening.” According to Colijn, a contraction in 2024 seems like a “real scenario.”
Conditions far from smooth
The arguments suggest that asset owners, particularly those considering riskier investment options, may need to be cautious. The conditions appear to be far from the smooth descent that the term “soft landing” implies, with several economic indicators signaling a possible turbulent period ahead for the U.S. economy.
As central banks globally ponder their next moves, investment professionals are left to consider what could turn out to be a more complex landscape than current consensus indicates. After all, in an environment of looming economic stressors, a soft landing may not be the safest bet for asset owners after all.
A Dutch version of this article originally was published on InvestmentOfficer.nl.