This is not a soft landing, and reaccelerating growth will bring back a more hawkish Fed, economist says

• This is not a soft landing, and reaccelerating growth will bring back a more hawkish Fed, Apollo's chief economist said.
• While cyclical sectors have slowed, non-cyclical sectors have been strong, still fueled by post-Covid demand.
• "In short, the Fed is not done fighting inflation, and, as a result, it is too early to argue that this is a soft landing."

This economy doesn't look like it's going to keep a lid on bubbling growth, and it might just blemish the prospects of loosening monetary policy, Apollo Management's chief economist said.

The risk of a more hawkish Federal Reserve was highlighted Thursday with the latest consumer price data that showed inflation picked up by more than expected last month.

"The likely scenario is that the economy will reaccelerate over the coming months, which will put renewed upward pressure on inflation and, hence, bring back a more hawkish Fed," Torsten Sløk wrote in a note just before the CPI report titled "This is not a soft landing."

To be sure, the economy has indeed been pinched by the Fed's aggressive rate hikes that began in March 2022, especially rate-sensitive cyclical sectors like housing, Sløk said. 

So what's turning up the heat in the economy that could herald a hawkish return?

"Non-cyclical components have continued to see strong growth in particular with strong post-Covid tailwinds to restaurants, hotels, and airlines," the economist explained.

That pent-up demand that gushed over the economy after the pandemic wore off is still stoking consumer spending today, according to Sløk. 

Meanwhile, financial conditions have been easing since Silicon Valley Bank collapse in March last year. They eased again towards the end of 2023 amid the rally in stock, credit and bond markets that was further encouraged when the Fed in December signaled rate cuts ahead, "likely boosting the cyclical components of GDP."

"In short, the Fed is not done fighting inflation, and, as a result, it is too early to argue that this is a soft landing because both the cyclical and non-cyclical components of GDP are likely to be solid over the coming months," Sløk said.