Soft Landing? Hard Landing? Maybe It’ll Be No Landing

The Federal Reserve, the Biden administration, and many in economics, finance, and business have all been pulling for a soft landing — a gradual reduction of inflation without heavy unemployment or a recession.

It surely beats a hard landing in which the economy hits the ground hard in a slowdown and unemployment spikes. Anyone who wants a result like that must seem part sadist, part masochist.

But markets are wondering whether the upshot will be no landing — strong economic growth with employment but inflation remains a problem and little to no room for the Fed to cut rates. That in turn means interest rates remain higher.

Economist and Harvard Profession Lawrence Summers made this point last Friday when the September jobs numbers came out.

“Today’s employment report confirms suspicions that we are in a high neutral rate environment where responsible monetary policy requires caution in rate cutting,” Summers posted online. “With the benefit of hindsight, the 50 basis point cut in September was a mistake, though not one of great consequence. With this data, ‘no landing’ as well as ‘hard landing’ is a risk the [Federal Reserve] has to reckon with. Nominal wage growth remains well above pre-COVID levels and it does not appear to be decelerating.”

Bond traders are offering the same take, except through their actions, not social media postings, Bloomberg reports. The unexpectedly good jobs report snapped their heads back to watching for a no-landing scenario.

The yield on the 10-year Treasury closed Monday at 4.03%. That’s the first time since July 31 it broke the 4% mark. Yields on other Treasurys are also up. This is taken as a financial sign of expectations that interest rates will be higher going forward. Currently, the forward curves on the 10-year show yields hitting 4% in early 2026.

Traders had been expecting slower growth, low inflation, and aggressive rate cuts. The news about jobs last week seems to have changed their attitudes. Following the data, what seems more likely is higher rates going forward and an end to the Treasury rally. As yields rise, prices drop.

“The pain trade was always higher-front end rates due to less rate cuts being priced in,” George Catrambone, head of fixed income, DWS Americas, told Bloomberg. “What could happen is the Fed either delivers no more rate cuts or actually finds itself having to raise rates again.”