The Federal Reserve crashes the plane en route to a soft landing

On the weekend of 24 April 2022 two pilots attempted, for a sponsored stunt over the Arizona desert, to jump between two aircraft in mid-air. One of the planes went into the ground. Nobody was hurt, the market bull it landed on excepted, and the sponsor’s name was Red Bull. This page used the stunt as the illustration for the Federal Reserve’s own flight plan, a “soft landing” for an economy running at the highest inflation in forty years, and recorded what the descent looked like before the Fed had touched a single control.

Nothing had been done yet

It is worth being precise about the timing. By late April 2022 the Fed had raised its policy rate once, by a quarter point, in March. It had not begun to shrink its balance sheet; that was scheduled for June. Through the first quarter it had still been adding to it. The stock and bond markets were falling on the announcement of tightening, not on tightening itself. The last time the Fed had tried the same manoeuvre, in 2018, the market had run erratically all year and the Fed had flown it into the frozen ground that December, then reversed. Now it proposed the same manoeuvre from a greater height, with the same training.

The flight paths

Wolf Street’s charts showed the descent of the stocks that had held the indexes up. Meta, nicknamed Faceplant here, had fallen vertically since its February earnings and bounced once, which is not how a landing is supposed to go. Microsoft attempted what pilots call a touch-and-go, and Wolf Richter noted, with some amazement, that its chief executive had sold half his shares at the exact top the previous November. Amazon was on its third attempt at a landing. Tesla was a skid mark from its own bear market, having spent most of the year in one. In every case the decline began with the Fed’s announcement of its taper in November 2021, months before the invasion of Ukraine; most of the giants actually rose in the first month of the war and fell again after.

Beneath the giants the damage was already severe. Richter reported hundreds of stocks down since February 2021, the most hyped of them “taken out the back and shot”, down 70, 80 and 90 per cent, often within months of listing. The large stocks had kept the indexes from showing it. By April they were letting go one at a time.

Bonds were not a safe haven

The usual refuge from a falling stock market is the bond market, and it was falling faster. James Bullard of the St. Louis Fed said that week that the bond market was “not looking like a very safe place to be”, and Bloomberg described waves of selling in Treasuries that had roiled investors and analysts. This was the point made on the preceding page: a bond market released from two years of Fed purchases was repricing all at once, and the repricing was taking stocks with it.

The manoeuvre still to come

The Fed’s plan, in the metaphor, was to attempt a loop in a 747 with the engines off and to finish it by landing inverted on a mountain ridge with no runway: to remove liquidity, raise rates rapidly, and bring inflation down without a recession, something no central bank had done from this starting point. The advice was to be prepared or be scared, and to remember that the ride had not begun.

Later note. The Fed raised rates by half a point in May 2022, three-quarters in June and at each of the next three meetings, and began shrinking its balance sheet in June. The S&P 500 bottomed in October 2022, down about 25 per cent; the Nasdaq about 35; the aggregate bond index had its worst year on record. The economy did not enter a dated recession. Whether that constitutes a soft landing, an inverted one on a ridge, or a landing at all is the argument the rest of this section records.