A Columbia Threadneedle look at the “tug of war” between inflation and recession yielded a familiar refrain: A hard landing is more likely than a soft one, and expect depressed corporate earnings for 2023.

A panel consisting of Edward Alhussainy, senior interest rate and currency analyst; Anwiti Bahuguna, head of multi-asset strategies; and Steven Bell, chief economist for Europe, the Middle East and Africa, convened online yesterday to take a global view of the discussions about the Fed’s hawkish response to inflation.

Other central banks have been acting in similar fashion by raising interest rates and enacting policies that reflect the specific pressures within their countries. But whither the Fed goes, so goes the rest of the world, the panelists said.

“Despite immense volatility in both bond markets and equity markets, we’ve seen absolutely no sign of any trouble in the initial jobless claims. In other words, many parts of the market are screaming recession and caution, but if you look at jobless claims, they’re at rock-bottom,” Bahuguna said. “I haven’t seen anything that says that the tightening that they’ve already done—and what they’re planning to do—has had any impact on the labor market of any significance yet.”

Alhussainy said that the Fed must find this frustrating, as suppression of the labor market is an integral part of conditions that would ease inflation. He said if the Fed is successful and in 12 to 18 months underlying inflation is at around the 2% that’s hoped for, the soft landing/hard landing scenarios loom for the end of 2023 and early 2024.

“In the one, there’s not too much damage to the labor market, we get lucky and it turns out that the inflation was supply-side driven, and perhaps the tightening of the financial conditions disproportionately affects those areas of inflation that are running hot right now,” he said. “Then the Fed arrives at the soft landing.”

However, he cautioned, the Fed’s been dialing up the probability of a hard landing in the last couple of months, and the data is beginning to show that this is the far more likely outcome.

For example, the jobs report that came out today showed that openings dropped by 1.1 million to 10.1 million on August 31. The drop was just one quarter of the four million decline that Bahuguna said would show that the Fed had gone far enough with its interest rate hikes and a soft landing would be possible.

“If today’s job report comes down three to four million and we don’t see unemployment rise, then that’s the soft-landing scenario. Demand for labor comes down, but we don’t actually have to fire people,” she said, ahead of the report. “That scenario is not likely. When unemployment starts rising, it doesn’t start rising by half a percent or so. You very quickly go to 6% or 7% unemployment. That’s the hard landing.”

It’s also not possible to decelerate wage growth without increasing unemployment, she said, as there need to be a lot fewer jobs out there to dissuade employees from asking for 5% raises.

Across the pond, where household energy costs have soared to stratospheric levels, Bell said various levers are being pulled by politicians to avoid recession, but that’s putting the central banks in the position of having to raise interest rates to prompt economic contraction.

For example, the average home energy bill has annualized to an increase of more than 3,000 pounds over normal levels, he said, which would be incredibly hard for the citizenry to handle and would have done the trick in term of entry to recession. But Britain’s new prime minister, Liz Truss, capped the increase to 2,500 pounds in response, creating another inequity where homeowners and homeowners-to-be will feel economic pain first and more deeply, Bell said.

“Pretty much everyone in Britain has a utility bill, but a much smaller number of people have a mortgage,” he said.

Even if the impact of these economic manipulations on job numbers and inflation has yet to be seen, the world of investing is already witnessing changes, the panelists said.

“It’s too late to look for inflation hedges. That train is over and done with for a few months now. The markets believe inflation will come down either because of the Fed and a recession, or because things will improve on the supply side,” Bahuguna said. “Unless we have a clear picture that multiples are getting compressed enough or we see the data improve, it’s best to be in a neutral position.”