Treasury Secretary and former Federal Reserve Chair Janet Yellen recently noted that the Fed has the wherewithal to deliver a soft landing. Yellen’s assertion comes as Fed Chair Jerome Powell embarks on a higher interest rate cycle, starting after the central bank’s next Federal Open Market Committee (FOMC) meeting scheduled for March 15-16, 2022.

I certainly hope Yellen is right. But she should know better, as history shows that the only time a true soft landing in the economy has occurred was in 1994. As I describe below, conditions then were nothing compared to today’s tangled world.

Hint: the stock market holds the key.

What’s a Soft Landing?

First things first: what in the world is a soft landing?

It turns out that in Fed speak, a soft landing refers to a reduction in inflation, via higher interest rates, without causing a recession. Fair enough, and yes it sounds like something worth going for.

The only problem is that it’s nearly impossible to pull off. That’s because the U.S. economy is more like an aircraft carrier than a motor launch. It’s just too big and complex. And when you add the variables and uncertainty introduced by Ukraine and other geopolitical issues it becomes clear that, good intentions aside, a soft landing is a very tall order.

In addition, the Fed usually starts new policy directions, either by raising or lowering interest rates, when the need for such changes has been well under way.

Although this remains to be seen, the Fed could be raising interest rates just as hyperinflation related to the war in Ukraine stalls the economy.

It Worked in 1994

In 1994, the Maestro himself, Alan Greenspan, pulled off a soft landing in his capacity as Fed Chair. He deserves credit, but no external crises were unfolding.

Keep in mind, the Fed failed to produce a soft landing in 1987, the year the stock market crashed. A soft landing also was elusive in 1990, during the first Gulf War. Greenspan chaired the Fed in those years. More recently, Ben Bernanke, Greenspan’s successor, failed to deliver one in 2008, while the current Fed Chairman Jerome Powell failed to deliver the ever elusive desired outcome in 2020 during the COVID pandemic.

What does that tell us about the odds of a soft landing in 2022? Unfortunately, with the Ukraine crisis worsening, the odds look slim. But not altogether impossible. Here is why.

How Can it Work Today?

It is often said that the phrase “this time is different” on Wall Street is usually the prelude to something really bad happening. But 2022 is indeed a lot different than even 2008. That’s because COVID changed everything. This is especially noticeable when one looks at the amount of federal spending that took place to keep the economy from imploding and the effect that has had on the stock market, the economy, and inflation.

Indeed, at the center of the current economic environment are the strains on the supply chain, meaning that this is a supply related crisis. In plain language, demand hasn’t changed while supply has grown.

Moreover, as I’ve noted before, the stock market is now the primary mover in the U.S. economy. I’m referring to my MELA system, where M stands for markets, E for the economy, L for people’s life (financial) decisions, and A for algorithms (algos). The latter is the pervasive artificial intelligence that runs communications and other important systems.

Specifically, it’s the algos that make things happen faster as their programming accelerates both the speed with which information flows as well as influencing the flow of money from one asset class to another.

The stock market is the key to the economy because a sizeable portion of the population makes financial decisions based on the status of their Individual Retirement Accounts (IRAs), their 401k plans, their trading accounts, and even their crypto holdings. Mr. Powell needs to thread a very fine needle to reduce inflation without crashing the markets.

Live Now, Pay Later

The world runs on debt. That’s because by borrowing money investors and people in general are able to put their plans into effect in the present and pay off their indebtedness over time.

Certainly this arrangement works as long as there is enough money sloshing around the system to be borrowed and paid back.

The secret is managing the liquidity of the system, which is the amount of money that is available for banks and large financial firms to lend one another to keep the system running.

Moreover, as long as liquidity is ample, the odds of a stock market crash are relatively low because investors are confident and they continue to put their money in stocks.

Thus, if Powell raises interest rates too rapidly, he will drain the liquidity of the financial system to a dangerous level. And if this happens expect the following:

• A significant stock market decline;
• A subsequent slowing in the economy as 401k plans and related accounts fall in value and spending slows;
• Rising rates for mortgages, business and auto loans; and
• Rising unemployment.

In other words, a recession.

What’s a Fed Chairman to do?

Powell has an unenviable task. The odds are against him, and he is facing extreme uncertainty as the Ukraine situation unfolds. As a result, he’s got to think outside the box. And that may mean that he has to do a lot of talking in between rate hikes.

That’s because if Powell plays it right, the talking will do a lot of the work for him in terms of calming inflation. And when he speaks, he’s got to say things that soothe the stock market and investors, such as the Fed will be “measured,” and “data dependent,” before making decisions.

Finally, regardless of the prevailing pundit sentiment about what the Fed’s role ought to be, and whether its job is to save the stock market or not, because of the MELA phenomenon, he’s got to convince investors that he’s got their back.

Otherwise, history is not on his side, and he won’t likely deliver the elusive soft landing. For without the stock market, there is no economic strength.

Editor’s Note: Dr. Joe Duarte just provided you with invaluable investment advice. You should also consider the expertise of our colleague Jim Fink.

Jim Fink is chief investment strategist of the elite trading services Options For Income, Velocity Trader, and Jim Fink’s Inner Circle. He has agreed to show 150 smart investors how his “paragon” trading system could help them earn 1,000% gains in just 12 months. We’ve put together a new presentation to explain how it works. Click here to watch.