The elusive “soft landing” for the U.S. economy appears in sight. However, if Federal Reserve Chief Jerome Powell and his co-pilots at the central bank keep a heavy hand on the throttle, the economy might crash on the runway.

The most adventurous activity I’ve ever undertaken is learning how to fly a helicopter, back in the late 1990s when I edited an aerospace magazine. Safe landings required finesse and an almost zen state of calmness. When Powell makes his hawkish perorations at press conferences, I don’t detect much finesse from the nation’s monetary pilot.

Federal policymakers in Washington are deservedly taking bows in the fight against inflation, but let’s be clear. Although interest rate hikes have helped curb inflation, one of the biggest disinflationary factors has been the mending of supply chain inefficiencies that were caused by the coronavirus pandemic. Monetary policy has little control over the global distribution infrastructure.

At its next meeting July 25-26, the central bank’s Federal Open Market Committee (FOMC) will either hike rates by 25 basis points, or “pause” again. However, not all economic problems can be fixed by top-down monetary policy.

The latest data show that U.S. inflation is falling steadily to the point where huge destabilizing price spikes are no longer a credible concern. The year-over-year pace of consumer price index (CPI) growth in June dropped from 4% to 3%, which is darn close to the Fed’s target of 2%. That’s a rather arbitrary target, by the way. The Fed has yet to convincingly explain why 2% is so significant. But that’s another topic, for another day.

Fact is, the Fed is an inherently conservative institution and its officials are intent on burnishing their inflation-fighting credentials. They continue to lionize former Fed Chair Paul Volcker, who vanquished hyperinflation in the early 1980s via brutal rate hikes.

In 1981, the prime rate rose to 21.5%, paving the way for the 1980–1982 recession. The national unemployment rate rose to over 10%.

Despite the encouraging news we’ve been getting on the economy (not too hot, not too cold) and on inflation (clearly in a downtrend), the Fed is likely to hike at least one or two more times this year. But if the Fed doesn’t ease up soon, it could cause unnecessary damage to the economy.

The stock market has embarked on a robust and sustained rally year to date, driven by the artificial intelligence (AI) boom but also by increasing economic optimism. However, the Fed remains a wild card.

Until the tightening cycle comes to a definitive end, investors will have to grapple with uncertainty and volatility. For Wall Street, the next few weeks will be pivotal.

The main U.S. stock market indices closed higher Tuesday, as follows:

• DJIA: +1.06%
• S&P 500: +0.71%
• NASDAQ: +0.76%
• Russell 2000: +1.27%

We’re witnessing more than just a Fear Of Missing Out (FOMO) rally driven by the AI craze. The New York Stock Exchange Advance Decline line (NYAD) is hovering well above its 50- and 200-day moving averages, indicating expanding market breadth. In addition to the technology sector, financials and small-cap stocks have been outperforming.

In the meantime, the jobs market remains healthy (but not too strong), and second-quarter corporate earnings so far have been surprising on the upside.

For Q2 2023, the blended year-over-year earnings decline for the S&P 500 is -7.1%, according to FactSet. However, with 6% of S&P 500 companies reporting actual results, 80% of companies have delivered a positive earnings surprise and 63% have reported a positive revenue surprise.

China’s economic growth disappoints…

Foreign equity benchmarks have been rallying roughly in tandem with U.S. stocks, although China has recently emerged as a concern. Beijing reported on Monday that second-quarter 2023 gross domestic growth (GDP) in China rose 6.3%, well below consensus expectations for 7.3% growth (see chart).

The Chinese data pointed to a particularly worrisome trend: the youth unemployment rate among people ages 16 to 24 surged to a new record high of 21.3%.

China’s draconian COVID restrictions, although now lifted, continue to exert a lagging deleterious effect on the country’s economy. Beijing policymakers are considering stimulus. Problem is, China is grappling with massive debt and a shaky real estate sector.

The good news is that the U.S. is likely to avoid an outright recession, despite the false narrative spun by gloomsters that the economy is broken. Sometimes, when I listen to certain economic pundits on the tube, I wonder: What alternate universe do they live in?

Most credible economists (i.e., people with advanced degrees who actually studied economics in college) agree that the U.S. is, for now, not in a recession.

WATCH THIS VIDEO: What The Bears Still Get Wrong

Accordingly, now’s the time to gain exposure to growth stocks. Much of the fuel for this rally has derived from enthusiasm over AI. If you’re looking for a way to cash in on the AI super-boom, I suggest you consider the advice of my colleague Jim Pearce.

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John Persinos is the editorial director of Investing Daily.

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