Estimated Read Time: 3 minutes and 57 seconds

This Week’s Issue

• Quick Intro

• QuickTake - Central Banks

• HBR - Economic Soft Landing

• Suggested Readings

• Next Week…

A Quick Intro

Hey ya’ll, thanks for popping in to read the third edition of Grade K MBA! This week I want to hop in and share some things I have been reading in different media, specifically The Harvard Business Review and the latest edition of Bloomberg QuickTake. Hopefully, by taking recent coverage and distilling it down to key takeaways, you can find additional utility from this newsletter.

QuickTake - Central Banks Tough Choices

I love Bloomberg QuickTake. It’s a twice-annual publication that briefs you on the most important topics they feel you should be keeping an eye on. One particular economic article that caught my eye was around the central banks. Below I have distilled it down into the key lessons:

1. US Federal Reserve's Interest Rate Hikes: The US Federal Reserve began increasing interest rates in March 2022 to curb inflation. These actions have led to discussions and recalculations about the possible achievement of a "soft landing," (see below) where the economy slows down enough to control inflation but doesn't cause significant unemployment.

2. Dangers of Overshooting: If the Fed's aggressive credit tightening measures are too extreme, it could lead to recession. Economists are worried that it could damage the strong labor market, causing unemployment to rise significantly and leading to widespread job loss.

3. Dangers of Undershooting: If the Fed doesn't increase interest rates enough or for a sufficient period, the US could end up with persistently high inflation. This was the case in the 1970s, according to many economists. Current challenges include uncertainty about how long it will take for the interest rates already in place to have their full effect.

4. Strategies for a Middle Ground: Various strategies are being considered, such as the "soft landing" successfully executed by the Fed in 1994-1995, a "growth recession" where growth slows but the economy doesn't contract, and a "no landing" scenario where growth reaccelerates after an initial downshift.

5. Impact of Banking Crisis: A significant banking crisis in the US complicated the economic scenario, making the landing even trickier. The crisis could potentially cause a credit crunch that could send the economy into recession.

6. Persistent Inflation: Inflation hasn't fallen rapidly, partially due to a tight labor market, with employers raising wages and subsequently prices to retain workers. These increased wages provide households the means to pay the higher prices.

7. Status of Other Central Banks: Central banks in different parts of the world face a variety of challenges due to differing inflation rates. The European Central Bank, the Bank of England, and several Central Banks in Latin America have raised interest rates to combat inflation. In some instances, this has led to political conflict, as is the case with Brazil's President criticizing his central bank's decision to maintain high interest rates even as inflation fell.

HBR - Economic Soft Landing

Recently, I was reading about the U.S. Economy’s projected soft landing on The Harvard Business Review’s website. I figured it was prudent to boil that article down into something a bit more digestible:

Despite previous fears of an impending recession, the U.S. economy has demonstrated remarkable resilience. This is primarily due to the successful "soft landing" facilitated by the Federal Reserve, which has managed to lower inflation without triggering a recession. The labor market has cooled without an increase in unemployment, which is typically the clearest sign of a recession.

However, the future of the economy remains uncertain. Various factors played into the inaccurate recession forecasts, including the underestimation of the U.S. economy’s resilience due to over-reliance on historical models and precedents, which did not take into account unique situational contexts.

Four aspects that demonstrated significant resilience included:

1. Labor market: Despite widespread assumptions that monetary policy would reduce labor demand, hiring remained strong in many sectors.

2. Consumer spending: Predictions of a collapse in spending due to layoffs and inflation were proven wrong as aggregate income growth due to robust hiring mitigated the impact.

3. Housing market: Rising interest rates did not cripple the housing market as feared due to a low housing inventory.

4. Financial system: Fears of a financial system collapse due to higher rates from the Federal Reserve were exaggerated.

Looking ahead, three scenarios could play out:

1. Overshooting economy: If demand outstrips the economy's capacity, another round of inflation might occur, leading to another cycle of monetary tightening.

2. Just-right economy: If demand grows in line with the economy's capacity, growth rates could remain steady without renewed inflation pressures.

3. Better-than-good economy: If the economy's capacity grows faster than demand, rapid growth without cyclical inflation could occur, facilitated by robust capital formation and labor participation.

While the first two scenarios are straightforward, the third scenario, where capacity outpaces demand, would likely require a substantial boost in productivity. Many are quick to associate higher growth with the advent of AI, but it's important to remember that technology alone does not guarantee faster productivity growth. Tight labor markets usually spur process transformation when firms substitute capital for labor.

In all these scenarios, business leaders need to navigate economic uncertainty without over-relying on macroeconomic models. They should prepare for the possibility of an economy with tighter margins and higher, healthier interest rates, while continually investing in capital for labor substitution, reinvention, and more technological absorption. All these steps can pave the way towards a "better-than-good" economic scenario.

Suggested Reading

• We have a blog! - https://gradekmba.medium.com/

• The Harvard Business Review

• Bloomberg QuickTake

What to Expect Next Week

Next week we will be back to our bread and butter - a mix of theory and case studies. I have been watching and reading A LOT on the subjects of leadership, psychology, business management, and finance. I would expect, then, that next week will include some mix of those topics.

Until Next Time

Thank you so much for giving this issue of Grade K MBA a read. I hope this edition was interesting and engaging for you.

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Be Good!

~Dan