Weekly Buzz: The runway for a US “soft landing” has widened

29 September 2023

Data out last week has made a "soft landing" for the United States look a little bit more likely – that Goldilocks scenario where the economy slows just enough to bring inflation lower, but not so much that it enters a recession.

The “soft landing” scenario

Federal Reserve officials (the Fed) have released a new set of economic projections, alongside their decision to hold interest rates steady. They’ve forecasted a milder inflation outlook and stronger growth this year, compared to estimates released in June.

For core inflation, they’ve reduced their forecast for 2023 to 3.7%, down from the previous 3.9%. Though it’s estimated that inflation won’t return to the central bank’s 2% target until 2026.

Meanwhile, estimates for economic growth this year rose sharply to 2.1%, from 1%, and 2024's forecast was also adjusted up to 1.5%. The median GDP forecast for 2023 is now five times more than where it began at the start of the year.

And the Fed’s tone has shifted positively, to accommodate for what appears to be a growing sense among US central bankers that the runway for a soft landing has widened.

As an investor, what does this mean for me?

The road ahead still involves some belt-tightening. As the battle against inflation continues, it's likely that the US will keep monetary policy restrictive (our Jargon Buster below breaks this down) up to 2026. The forecast summary shows most policymakers continue to expect one more rate hike this year, bringing it up to 5.6%.

Still, as the US economy continues to prove its resilience, that sought-after soft landing is now looking more likely. Such a scenario – the alternative being a full-blown recession – would be a boon for most assets, given the importance of the US economy globally.

When it comes to building your wealth however, it might be better to bet on the long term. Rather than speculate on potential outcomes, investing in a well-diversified portfolio (shameless plug for our General Investing portfolios here) helps you aim for a long-term landing instead.

This article was written in collaboration with Finimize.

💡 Investors’ Corner: Dealing with analysis paralysis

As an investor, you might feel like you need to know everything before making the perfect decision. For some, it’s what keeps them from getting started in investing – analysis paralysis. But the fact of the matter is, there will always be unknowns in investing.

Investing is about taking smart risks with the best data available, accepting that there are some things that aren’t within control. Needing to know everything before making a decision could mean missing out on investment opportunities.

And analysis paralysis can lead to lost time too, a crucial factor when it comes to building your long-term wealth. The longer your money stays invested in the market, the more time it has to grow alongside its ups and downs, all the while leveraging on compound interest.

If you find yourself plagued by analysis paralysis, it’s important to first define your goals. From there, you’re able to start narrowing your options down to the few that best match it. But sometimes, the best move is realising that it's okay to make mistakes as long as you're careful, and you learn as you go. It's all part of the investing journey.

🎓 Jargon Buster: Monetary policy

If you’re driving your car on the highway, your goal is to keep a steady speed, not too fast and not too slow. Monetary policy is the central bank's toolkit to do just that, but for the economy.

If an economy is moving too slowly, central banks can step on the gas by making money cheaper with lower interest rates. But if the speed’s going out of control, they can hit the brakes by making borrowing more expensive. All this to keep their economies cruising smoothly.

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