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The No-Landing Scenario: Understanding Its Impact on Financial Relief and Borrowing Costs for Americans

Mike Cianciabella | October 9, 2024

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The No-Landing Scenario: A Challenge to Financial Relief for Americans

The United States economy may face an unexpected paradox: a “no-landing” scenario, where growth persists without any anticipated financial relief for many Americans. This situation could destabilize hopes for lower borrowing costs, as inflation is reignited, leaving the Federal Reserve’s rate-cutting options hamstrung.

Understanding the No-Landing Scenario

In economic parlance, a no-landing scenario refers to a situation where the economy continues to grow robustly, yet inflation simultaneously remains problematic. Contrary to the hoped-for economic downturn that would allow room for interest rate cuts, current indicators suggest the economy remains resilient. The momentum of economic expansion could suppress the financial relief many are hoping for.

Recent Economic Indicators

The narrative of a no-landing economy has been revived recently following the unexpectedly strong jobs report released in September. The US economy added 254,000 jobs, which far exceeded economists’ forecasts. Additionally, upward revisions to job gains for July and August indicate that the economy has not weakened as much as anticipated after prolonged exposure to high-interest rates. According to Ed Yardeni, president of Yardeni Research, the strong employment situation implies that the Fed may not lower rates any further this year.

The Implications for Federal Reserve Policy

Yardeni noted in a client message, “September’s strong employment report and upward revisions in July and August murdered the hard-landing scenario.” This robust job growth feeds directly into a reassessment of federal monetary policy. Two economic experts, Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, and Steven Blitz, Chief US Economist at TS Lombard, both voiced concerns that the possibility of a 50 basis points rate cut in November has diminished due to the job report details. Horneman stated, “Stronger job creation may result in a rise in prices which further complicates the Fed’s job.”

Impact on Housing and Consumer Borrowing

As markets reflect this no-landing sentiment, bond prices and corresponding yields adjust accordingly. The 10-year Treasury yield surpassed 4% for the first time since August, hinting at a tighter monetary condition ahead. What’s more concerning for many Americans, particularly prospective homebuyers, is the relentless rise in borrowing costs. Rates for 30-year mortgages have risen instead of decreasing, even following the Fed’s most significant rate cut. Without a clear trajectory for further rate reductions, home affordability remains elusive for many consumers.

As consumers await easing borrowing conditions, the harsh realities of current credit expenses persist. Credit card interest rates surged to 21.7% in August, marking a record high over the past two decades. Similarly, the rate on new 48-month auto loans peaked at 8.6%, the highest recorded in over a decade. Consumer mortgage originations plummeted to $44 billion in August, a steep drop from $212 billion in 2021, as noted in data from the Philadelphia Fed.

Consumer Sentiment and Financial Flexibility

The ongoing dilemma for American consumers is clear. “With benchmark interest rates coming down, most prospective borrowers don’t feel relieved of high borrowing costs,” remarked Mark Hamrick, a senior economic analyst at Bankrate. For many, financing significant purchases—whether homes, cars, or household items utilizing credit—is increasingly challenging.

Conclusion: What Lies Ahead?

Ultimately, the evolving landscape of the US economy implies that Americans may have to adjust their expectations for financial relief. The no-landing scenario entrenches higher borrowing costs, impeding aspirations for lower rates that would make significant purchases more accessible. Instead, rising inflation risks becoming a renewed concern, which may compel the Federal Reserve to adopt a more cautious stance. For consumers, uncertainties abound, as financial opportunities seem increasingly limited amid a backdrop of potential economic resilience.