Bracing for Impact: Are You Ready for a Soft or Hard Landing?

Bracing for Impact: Are You Ready for a Soft or Hard Landing?

April 25, 2024

Since 1954, the Federal Open Market Committee (FOMC) has gradually increased rates to curb inflation thirteen times before considering reversing the hikes and bringing the interest rates back down. It is just something that happens, like crummy weather, while you are at the beach. One way to navigate a volatile market is to understand what is happening and how to prepare today for such an event.

 

How could a “soft landing” impact you? Are you ready?

When the Fed increases interest rates enough to slow down the economy and curb inflation without sending the economy into a recession, this is called a “soft landing.” The metaphor of using the aviation term “soft landing,” to describe the economy refers to an aircraft landing without damaging the vehicle or the contents within it.

 

How could a “hard landing” impact you? Are you ready?

A hard landing occurs when a significant economic slowdown follows swift economic growth. For example, when the Federal Reserve decides to raise interest rates to curb inflation, it may turn the economy into a period of stagnation or, ultimately, recession. The term "hard landing" was taken from the world of aviation as a metaphor for an aircraft descending with greater vertical speed and force than in a normal landing without actually crashing.

However, "hard or soft landing" terms are somewhat subjective as no set definition exists to quantify each. Some market analysts argue that a mild recession with a minor increase in unemployment is a soft landing as opposed to a hard landing despite the economy being in an actual recession.

The most famous "hard landing" was probably from July 1980 to January 1981. The Fed raised the federal funds rate to north of 19%. The economy reacted with a 16-month recession that stretched from July of 1981 to November of 1982, with unemployment hovering around 10.8%. Eventually, the Fed lowered the interest rates, and the economy had a chance to begin healing.

The most prevalent "soft landing" occurred in 1994, when the economy struggled into its third year of recovery following the recession of 1990-91. In early 1994, the federal funds rate was at 3%, the Consumer Price Index (CPI) inflation stood at 2.8%, and the unemployment rate quickly fell. The Fed realized the economy was growing and unemployment was decreasing, and slightly raised rates to mitigate a potential increase in inflation. Throughout the year, the Fed cut rates seven times. Then, in 1995, it cut its primary interest rate, the federal funds rate, three times to keep inflation from rising. Former vice chairman of the Federal Reserve, Alan Blinder, called it the "perfect soft landing."

 

What can you do about it?

Whether the economy is idling in a soft landing or experiencing the crisis of a hard landing, it is critical that you are prepared for such an event and manage your finances carefully in the grips of economic uncertainty. Consider these seven tips for navigating an unstable economy.

 

1.      Create an honest and manageable budget

An honest budget that you can easily manage can help you navigate the tumultuous waters of an unstable economy. A strong budget can not only assist in your financial stability, but it can also give you confidence to help you push through difficult times because it is inevitable with a historically unpredictable economy.

2.      Cut back on your spending

Most of us frivolously spend far more than we truly need to. There is so much great stuff out there that makes life easier, more fun, better tasting, and more impressive, but during difficult times, being willing to cut back on unnecessary spending can go a long way.

3.      Build a comfortable emergency fund

Having a comfortable emergency fund can help lessen the stress and anxiety that come with market fluctuations and changes to the interest rate. Generally, saving enough to cover your expenses and lifestyle for up to 3-6 months is encouraged.

4.      Ensure you are diversified

You may hear about building a diversified portfolio all the time because it is that important. If you have your money spread out over different investments, should any take a hit in a volatile market, hopefully the others can help lessen the blow.

5.      Consult your financial professional

Consider consulting a financial professional to determine whether you are truly prepared to brace a soft or hard landing. Not only can they give you feedback on how you might fare should the market go haywire, but they can also help you create strategies and goals to address risk and options for preserving wealth.

 




Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

 

Sources:t

A Brief History of Hard and Soft Landings | Cato at Liberty Blog

Fed's Interest Rate History: The Fed Funds Rate Since 1981 | Bankrate

What is a soft landing? | Brookings

Soft Landing: Definition and History in Economics (investopedia.com)

The Great Recession and Its Aftermath | Federal Reserve History

 

This article was prepared by LPL Marketing Solutions

 

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