(News Bulletin 247) – The “no landing”, a scenario where high American growth combines with persistent inflation, began to worry investors a few days ago. Because it would pose a significant dilemma for the American Federal Reserve.

It’s a question that comes up frequently in the stock market: how will the economy (especially the American economy) fare? The terms “soft-landing” and “hard-landing” are therefore regularly used by market specialists.

These anglicisms refer to the way the economy behaves as inflation falls. The major central banks sharply raised their key rates to curb the rise in prices in 2022 and 2023 then maintained them at high levels until June for the European Central Bank (ECB) and in September for the American Federal Reserve (Fed ).

The “soft landing” describes a scenario where the economy absorbs the shock of rate increases without falling into recession while central banks manage to control inflation. In the case of a “hard landing”, inflation certainly returns to an acceptable level but the economy falls into recession (to simplify).

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A scenario where inflation picks up again

For several months, the markets have focused on the “soft landing” scenario, which actually seems the most likely, while fearing the “hard landing”. At the end of September, Bank of America noted that the “soft landing” was already fully integrated for European markets.

“The question that arises is the reaction of the economy following this period of high rates: are we heading towards a ‘soft landing’, the most likely scenario, or a harsher recession?” side questioned Arnaud Colombel, management director at Mandarine gestion, in a note published Monday.

But another scenario for the American economy is also beginning to float in people’s minds: “no-landing”. “A soft landing (or no landing) in the United States is once again becoming the base scenario, after fears of a slowdown in the American economy this summer have not materialized,” Deutsche Bank wrote on Monday, for example.

This “no landing” scenario for the economy corresponds to the scenario where “American economic growth would remain solid, while the current slowdown in Europe would be reversed”, explained John Plassard, investment advisor at Mirabaud, in March.

“Core inflation would remain stable at one or two percentage points above the central bank’s targets, encouraging monetary policy makers to continue to keep interest rates at a low level. high,” he continued.

Rates that may no longer fall

The problem remains that this scenario, if it came to pass, would force central banks to re-examine the monetary easing cycles that they have just started.

“Also in this theoretical case, the Fed would be required to manage key rates more closely and we could witness asset bubbles and imbalances in employment, among other things,” pointed out John Plassard.

The specialist stressed that in such a scenario, sovereign government bonds would constitute the assets most at risk, with the risk of strong liquidations on these securities. On the stock side, volatility could increase. “The uncertainty of the stock markets could lead to cautious behavior on the part of investors,” judged John Plassard.

This scenario of a “no-landing” gained strength at the end of last week, after the latest report on American employment, which reported job creations almost twice as strong as expected by economists. in the month of September. Unemployment has also fallen and American hourly wages have resumed their rise.

Which caused US bonds to suffer. The yield on the 10-year American Treasury bond rose from around 3.84% on Thursday to more than 4% since Monday. Remember that bond prices move in the opposite direction to rates.

“What could happen is that the Fed no longer cuts rates, or it finds itself forced to raise rates again,” warned George Catrambone of DWS America, quoted by Bloomberg.

The problem is that investors are pricing in another 50 basis points (0.5 percentage points) of rate cuts from the Fed between now and the end of the year, according to the CME Group’s Fedwatch tool. And 150 basis points by the end of 2025.

Jason Draho of UBS, however, tempers fears. “A no-landing scenario is a risk only if it is really a scenario of re-acceleration of inflation,” explains the specialist. “There is no indication that this is happening today, but it is a risk in 2025,” he concludes.