Are we Headed into a Soft Landing?
At the beginning of the summer, it felt to many of us as if the economy was going to fall off a cliff. Inflation hit a multi-decade high in June with the year-over-year Consumer Price Index (CPI) hitting 9.1%. A large component of the rise in the index was high energy prices. Oil hit $120/barrel in June and many experts were talking about the possibility of it reaching as high as $150-$200/barrel. These inflation drivers along with heightened international tension with the war in Ukraine and a hawkish Federal Reserve caused extreme volatility in the financial markets during the second quarter of 2022. During this time, the 10-year treasury, which is the benchmark index for most long-term fixed-rate loans, peaked on June 13th at 3.48%.
What has changed in the last 60 days?
The volatility that the financial markets were facing in the second quarter of this year has abated—at least for the time being. The year-over-year increase of the CPI dropped to 8.5% in July. While still high, many economists expect this number to continue to fall for the remainder of 2022. Oil prices (a big component of the CPI index) have fallen to below $90/barrel over the past 60 days, and it appears that the trend will continue downward. Many economists are now predicting that the Federal Reserve’s tightening cycle could end in 2022 and they may start dropping rates toward the back half of 2023. The prediction of longer-term inflation has also moderated, and the 10-year treasury is now trading at 2.88%.
Nobody really knows if we are in a recession or if we have hit a “soft landing” and these economic conditions are only known after their time periods pass. The good news is it appears that the most treacherous part of the cycle has passed.