Sophia’s Thoughts On Nailing The Soft Landing
September’s jobs report came out stronger than expected and macroeconomic factors are pointing towards a soft landing in the US. Has the Fed nailed the soft landing? And what does this mean for crypto?
These are Sophia's Thoughts:
The Federal Reserve’s efforts to guide the economy toward a soft landing are becoming more evident, with strong job growth and inflation under control.
While global rate cuts and stimulus measures are boosting market sentiment, the potential for volatility remains, especially with upcoming U.S. elections and economic uncertainties.
As confidence in the economy grows, risk-on assets like cryptocurrencies are seeing increased inflows, suggesting that the crypto market could continue to benefit from improving economic conditions.
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🛩️ What is a Soft Landing?
A soft landing is the ideal scenario in economic policy where inflation is brought under control without triggering a significant recession or causing widespread unemployment. Essentially, it’s the balance between curbing inflationary pressures while maintaining a resilient job market.
Currently, the U.S. Federal Reserve appears to be guiding the economy towards just that. After September’s surprisingly strong jobs report, where payrolls surged well above the anticipated 150,000 to by 254,000, the Fed has more confidence that a soft landing could indeed be on the horizon. Moreover, employment numbers for July and August were revised upwards by a total of 72,000 jobs. Chief economist at U.S. Bank Beth Ann Bovino said, “We’ve been expecting a soft landing. This just gives us more confidence that it seems to remain in place.” The labor market continues to show strength, even as inflation is cooling down from its peaks in 2022.
Former U.S. National Economic Council director Gary Cohn also pointed out that the Fed's goal of normalizing the economy is becoming more evident, noting, "This is exactly what a soft landing looks like." He further explained that the balance of inflation at 2%, unemployment around 4%, and gradual interest rate cuts would help keep the economy stable while avoiding the dramatic slowdown that many had feared. The soft landing scenario describes a delicate balance between reducing inflation and keeping the employment high – a task the Fed appears to be managing well so far per the recent data.
👓 Looking ahead
Central banks globally have enacted a wave of rate cuts, with 21 cuts recorded in September alone, marking the highest number since April 2020. The U.S. Federal Reserve lowered rates by 50 basis points, while the People’s Bank of China announced its most aggressive stimulus package since the pandemic. These measures are designed to stimulate economic growth and mitigate stagnation, injecting much-needed liquidity into markets. This combination of monetary easing and stimulus is boosting market sentiment, with central banks stepping in to support growth.
Despite this, some experts urge caution. David Kelly of JPMorgan Asset Management warned that equity markets may be overvalued, with investors potentially too optimistic about a smooth economic soft landing. Kelly stated, "I am getting increasingly queasy about the fact that the equity market keeps on pricing in a soft landing," suggesting that overconfidence in this outcome could leave markets exposed to sudden shocks. BlackRock noted that while rate cuts typically boost markets, the potential for volatility remains as investors anticipate the U.S. elections and broader global uncertainties. They added that while there may be volatility, much of it appears to be priced into the markets. As we move into the final quarter of 2024, the combination of monetary easing and rising global liquidity offers the potential for growth.
💸 What does this mean for crypto?
The prospect of a soft landing for the economy is encouraging for risk-on assets like cryptocurrencies. When people feel confident about the economy, they tend to take on more risks, and this optimism can spill over into the crypto market. The recent boost in economic sentiment thanks to rate cuts and stronger job data could drive more capital into digital assets. For the past month following the U.S. rate cuts, coin and market sentiment has been trending above positive.
Digital asset funds saw over $1.2 billion in inflows during the final week of September subsequent to the U.S. rate cuts, marking the largest weekly increase since July. This suggests a growing appetite for crypto as investors look to allocate their capital into riskier assets as economic conditions stabilize.
As the year progresses and the possibility of a recession remains low, the crypto market appears to be in a strong position. If the narrative around a soft landing holds, we could continue to see strong inflows into crypto-related investment vehicles, with more investors willing to take advantage of the positive sentiment surrounding both traditional markets and digital assets. But, we will stay tuned to see how the rest of the year plays out!
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