An Open Letter to the Soft Landing Consensus

To: Every strategist who wrote "one more cut and we're done" in the fourth quarter of 2024

You were so close. The disinflation had legs, the labour market was cooling without breaking, the Fed under Powell had managed something genuinely rare — a post-pandemic tightening cycle that didn't tip into recession. The models all said so. The yield curve was steepening. The dot plot implied cuts. You wrote it up, you put it in the deck, you sent it to clients. You went home feeling like you understood the thing.

Kevin Warsh held his first FOMC press conference on June 17. He mentioned "price stability" twelve times. Twelve. In a single press conference. The man was not making conversation.

Two-year Treasury yields jumped 16 basis points to 4.21% that day — their highest in over a year. The 10-year touched 4.5%. The 30-year eclipsed 5%. The Dow fell 507 points. And for the first time in this cycle, nine members of the FOMC submitted dots showing at least one rate hike before year-end. Bank of America, which had been pencilling in steady rates through 2026, revised its forecast within the week: three quarter-point hikes, taking the funds rate from 3.5%-3.75% up to 4.25%-4.5% by December. The previous base case had been no movement at all.

The soft landing people got the landing right. They just misidentified which airport.

Here is what the models missed, and why they always miss it. The terminal conditions of a successful disinflation depend on what follows the disinflation. If the post-landing environment involves a geopolitical oil shock, a $755 billion AI capex surge funded partially by debt, a fiscal expansion that makes the One Big Beautiful Bill look like a line-item adjustment, and a new Fed chair with strong theoretical priors about what 3.5% funds rates actually communicate to an economy running this hot — then "one more cut and we're done" becomes "three hikes and we're starting."

WTI crude ran from $57 at the start of the year to $113 in April. It's now back around $73 on Hormuz ceasefire optimism. But the damage to the inflation print is already baked. April CPI came in at 3.8% year-on-year, the highest since May 2023. April PCE was 3.8% headline, 3.3% core. The Fed's own revised projections now have PCE ending 2026 at 3.6% — against a prior forecast of 2.7%. That is not a rounding error. That is a full reassessment.

Real average hourly earnings have turned negative for the first time in three years, meaning workers are running faster to stay in place. The personal saving rate sits at 2.6%, near its lowest since mid-2022. Two-thirds of consumers told Conference Board surveyors in May that rising prices have forced them to cut back overall spending. The University of Michigan's final June sentiment reading is expected to come in around 48.9 — an index level that, when last reached, coincided with either a recession or its immediate aftermath. Neither is obviously in progress right now, but sentiment surveys this depressed tend to be either early or exactly right.

Consumer Confidence and JOLTS both drop tomorrow, Tuesday June 30. Nonfarm payrolls follow July 2. Warsh, who pointedly declined to submit his own dot-plot projection at the June meeting — the only member of 19 who didn't — will be watching. The absence of his dot is not humility. It is operational flexibility. He is telling the market: I am not pinned. You cannot front-run me.

This is how central bank credibility gets rebuilt after it erodes. You saw the same dynamic in 1979, when Volcker inherited a Fed whose anti-inflation signalling had been so thoroughly discredited that announcing a new operating procedure was the only way to force a belief-change. You saw a version of it in 1994, when Greenspan's surprise February tightening — the first hike in five years — hit bond markets so hard that it wiped 20% off the long end in a matter of months, a bloodbath that became known as the great bond massacre. In both cases, the Fed's tool wasn't just the rate. It was the demonstration that the institution was willing to cause visible pain in financial markets to make a point about its own resolve.

Warsh is operating in that tradition. Ed Yardeni argued last month that Warsh's best play is to hike early and hard enough to break the inflation expectation before it gets embedded — that doing so would, paradoxically, push long-term yields down by restoring credibility on the price stability mandate, eventually giving Trump the lower mortgage rates he wants without having to beg Jerome Powell for them. It is the kind of counterintuitive political judo that requires a Fed chair willing to take the short-term market hit. The 30-year at 5.138% is the price of admission.

The data this week hasn't helped. The Nasdaq had five consecutive losing sessions. The S&P fell 2% on the week. Consumer price increases are now getting passed through into consumer hardware — Apple raised iPad and MacBook prices citing the memory shortage, and its stock fell 6% in a single session. The inflation is moving from commodity inputs through supply chains into branded consumer products. That is the sequence that forces wages higher, which forces services inflation higher, which makes the Fed's job exponentially harder.

The soft landing was real. The mistake was thinking it was a destination.

In 1994, anyone who held long duration into the Greenspan surprise lost 20% on their bonds in six months. They had also enjoyed five years of relative rate stability beforehand. The lesson was not that the Fed had betrayed them. The lesson was that rate environments never freeze permanently, no matter how long they persist, and that the price of believing they do is eventually paid in one violent repricing rather than several manageable ones.

Tomorrow's JOLTS will tell part of the next chapter. Warsh will read it very carefully. So will you.

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This newsletter is for informational purposes only and does not constitute investment advice.