Three months ago, Jerome Powell chafed at the suggestion the Fed wasn’t aiming to achieve the mythical soft landing for the US economy.

“I was a little surprised to hear you say a soft landing is not a primary objective,” a reporter from Bloomberg told Powell, during the Q&A session following the September FOMC meeting. “To begin, a soft landing is our primary objective. And I did not say otherwise,” Powell snapped, his demeanor visibly indignant. “That’s what we’ve been trying to achieve for all this time.”

Fast forward to December, and the Fed pretty plainly believes a macro miracle is within their grasp. The data is generally playing along. Yes, core services inflation is warm, but overall price growth continues to move in the right direction, even if the progress may be a halting affair from here. Job gains have slowed as has wage growth, and 2.5 million job vacancies disappeared in 2023. But the labor market is resilient and as a result, so is the consumer. Spending is still more than sufficient to keep growth afloat and even persistently negative consumer sentiment took a turn for the better in early December, while inflation expectations receded to new two-year lows.

There are, of course, plenty of critics ready and willing to argue that soft landing odds remain very slim. One argument says the Fed’s attempt to thread the needle with rate cuts in 2024 will backfire and inflation will reaccelerate forcing policymakers to engineer a hard landing to bring price growth back under control. The other argument says it’s already too late to avoid a hard landing, and that a recession is just around the corner, we just can’t see it yet.

On Monday, Bill Dudley fretted that, “the central bank’s dovishness increases the possibility of no landing at all — that is, overheating and persistent inflation that could undermine the Fed’s credibility, while requiring renewed tightening and a deeper recession to get things back under control.”

That line of reasoning (the “early cuts risk a ‘no landing'” story) is by now so ubiquitous that it’s crowding out hard landing narratives. No small feat in a world where straightforward recession warnings tend to resonate more than cautionary tales that demand second order thinking, something most Americans are incapable of.

With that in mind, it’s worth noting that even in a scenario where the Fed cuts rates by the market-implied 150bps in 2024, policy would still be restrictive assuming neutral hasn’t shifted up by 125bps. That raises this obvious question: Is the bigger risk still just a standard, post-tightening “oops, we broke something” scenario?

Consider the figure below from Morgan Stanley’s Mike Wilson, who painstakingly annotated the history of Fed moves with two-year yields which, he said, have exhibited “a tight relationship… since the Greenspan Fed, which introduced the concept of forward guidance.”

Two-year yields, Wilson wrote, “tend to lead Fed funds by approximately five months,” but as his annotations show, there are periods when the Fed endeavors to be proactively dovish.

The most pronounced such episodes naturally followed paroxysms, but note that in 1994, the Fed was on the dovish side versus 2s. And stayed there. That, Wilson said, “may help to explain why 1994 proved to be one of the few soft landings that was executed effectively.”

Note the difference between that soft landing and the one the Fed’s trying to engineer currently. The Fed was more hawkish than markets this year, and until this month hadn’t clearly indicated a predisposition to pivot decisively.

As Wilson’s green annotation (on the far-right hand side) indicates, the forward curve suggests the Fed may stay hawkish relative to the two-year. “In the absence of an ‘event,’ this is the path that makes the most sense,” Wilson said. By “event” he meant a paroxysm like Lehman or COVID (or a war, and unfortunately war odds are elevated right now).

But, as much sense as relatively gradual cuts (e.g., to manage the real policy rate as inflation recedes) might make, such a path would leave rates restrictive at the end of next year, Wilson remarked, before casually noting that “this is why it’s important to watch the growth data to see if these policy shifts and significantly lower yields can have the desired positive effects.”

While it’s possible we could look up a year from now and discover the Fed’s barely budged, or even that rates had to be ratcheted higher, I continue to believe market pricing for 150bps of cuts is entirely rational and may well prove to be conservative.