Fed recession: Hard landing, soft landing, and no landing scenarios explained

Yahoo Finance’s Ines Ferre joins the Live show to explain hard landing, soft landing, and no landing scenarios.

Video Transcript

RACHELLE AKUFFO: Recent economic data, including January Producer Price Index and the initial jobless claims, out this morning pointing to a still strong economy. This as the Fed has made it clear it will continue to hold rates higher for longer to fight inflation. Here with more, Yahoo Finance's Ines Ferre. Hey, Ines.

INES FERRE: Yeah, Rachelle. The hard landing versus the soft landing, we have heard so much about this debate recently. A hard landing, what is it? Well, this is where a recession takes place where the Fed tightens so much that it creates a recession, that unemployment goes up, that people lose their jobs, that they cannot afford the things that they want to buy. And therefore, inflation is coming down. Yes, inflation comes down. But there is still a recession that takes place, people losing their jobs. And so this is-- the economy slows down so much during a hard landing that then the Fed is forced to pivot.

Now, a soft landing, that is being talked more and more about. Especially this year, we've heard more and more about that. This is where inflation is tamed, it is coming down, but perhaps not as many people need to lose their jobs as expected. Perhaps the slowdown is a little bit shallower. It is a softer landing.

And we have heard this narrative a little bit even during the Davos event back in January, where CEOs were being interviewed, and they were being they were saying that the situation wasn't as dire perhaps as they had thought in the later part of last year. So this expectation-- and you can tell also with the markets rallying-- the markets have sort of been pricing in perhaps there is a way for the Fed to thread this needle, and perhaps there is a way for a soft landing.

RACHELLE AKUFFO: And Ines, of course, we know, as you mentioned there, most of this attention focused on whether it's a hard landing or soft landing, but what about no landing? We're hearing that coming up now, where the economy grows, but inflation remains untamed.

INES FERRE: Exactly, and especially when we've seen the data points that have been coming out recently, where you saw the CPI, depending on how you read it-- you could read it as a hotter than expected CPI print-- where you saw the retail sales that came in hotter than expected. So a no landing is where the economy continues to grow, but inflation is not tamed the way the Fed wants it to be.

And so chief economist Torsten Slok over at Apollo Global Management, he says that the no landing scenario continues. And the risks are significant that inflation will stay sticky around 5%, much more than the 2% target that the Fed wants. And he says that that's not really surprising because you still have a strong labor market. You still have a wage growth that's been pretty strong. And you have these data points that are signaling that the consumer is still spending.

So ultimately, though, economists are saying the no landing scenario is not something that you particularly would want because what this would mean is that the Fed would have to keep at it for longer. It basically delays the Fed action. It delays a pivot. It delays a pause because the Fed would have to maintain rates higher for longer until it really brings down inflation, which is what it wants.

RACHELLE AKUFFO: Indeed. Great outlook there. Thank you so much. A lot of this terminology is getting thrown at people, so good to get that breakdown on the impacts there. Ines Ferre.