When the economy starts to get hot, the Fed has few tools that can be used in order to cool the economy. One of those is raising interest rates.
When the Fed uses its tools to boost or cool the economy, because nobody can predict the market perfectly, there is a risk that lies in the hands of the Fed that can lead to a recession (hard landing) or a soft landing.
So, what’s the difference between a hard or soft landing?
Long story short, a hard landing is a recession. Which is defined in a gray area in today’s world but in general, a recession is defined by a period in time in which the economy experiences declining GDP for two executive quarters. The NBER is the organization that determines recessions beginning and end dates.
A hard landing refers to a slowdown or downturn following a period of rapid expansion.
A hard landing can lead to a stock market crash, a financial crisis, or a collapse in investor confidence.
The last hard landing that we experienced in the U.S was in 2008 when the Fed started to tighten monetary policy to cool off the hot residential real estate market. The result was not a Recession, but a Great Recession.
A soft landing is a slowdown in economic growth that avoids a recession. This is the goal of the Fed and Central Bank while raising interest rates to stop the economy from overheating, or to cool inflation without causing a complete downturn.
When it comes to soft landings, as an airline passenger, we tend to take these for granted. In the economy the federal reserve does not have quite as strong a track record for soft landings.
As we know, during high inflationary times followed by rapid expansion, interest rates rise. The only way to navigate the economy is to understand how markets move and to control the risk.
Markets can be unpredictable, and being able to perfectly time markets is nearly impossible.
Those who have experienced Hard Landings understand the risk that lies in things ‘blowing up’.
And when things do blow up, that usually opens the floodgates for a short window of massive opportunity.
This is why we put so much focus on two main subjects; The Operator (responsible for the day-to-day operations), and The Basis (Price, Terms, Preference, etc.).