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National Debt

Is the Fed actually going to pull off a “soft landing”?

Matt Levin Jun 14, 2023
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Hold the applause for Federal Reserve Chair Jay Powell — there's more work to do before the economy can make a soft landing. Mandel Ngan/AFP via Getty Images
National Debt

Is the Fed actually going to pull off a “soft landing”?

Matt Levin Jun 14, 2023
Heard on:
Hold the applause for Federal Reserve Chair Jay Powell — there's more work to do before the economy can make a soft landing. Mandel Ngan/AFP via Getty Images
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One year ago, that fabled “soft landing” Federal Reserve Chair Jay Powell and company were trying to pull off seemed unlikely. In June 2022, headline inflation was 9.1% and the thinking was the only way that was going to come down was if the unemployment rate shot up. Back then, it was 3.6%, which was really low.

After more than a year of rate hikes, inflation has come down to 4% and unemployment is at 3.7% — still very low. Not only that, but gross domestic product is still growing, and we’re in a bull market on Wall Street.

So are we close to actually pulling off this soft landing thing?

Hamilton College economist Ann Owen is not one of those passengers who starts clapping in the cabin when a plane’s wheels touch down.

“I have never actually done that, but sometimes I feel like I want to do that,” she said, laughing.

Jay Powell might deserve a standing ovation if he actually does land this economy softly. It would be only the second time in history the Fed has significantly raised rates and tamed inflation without causing a recession. But any applause would be premature right now, Owen said.

“The captain has rung the little bell, told the flight attendants to go through the aisles and pick up the remaining garbage — but we haven’t landed yet,” she said.

The Fed wants inflation to drop down to 2%, which will may require more rate hikes. And that could mean more unemployment. Plus, there’s always the risk some external economic shock alters the flight path.

“In March, we had three regional-level banks fail,” said Julie Smith, an economist at Lafayette College. “I think the foreseeable shock is still going to end up being in the banking sector.”

Not to mention those unknown unknowns that can wreak havoc with the flight controls — like Russia’s attack on Ukraine or a pandemic.

Ironically, consumers feeling better about the economy right now could actually fuel inflation.

“If consumers believe we’re out of the woods — particularly with the lifting of the debt ceiling in combination with easing inflation — they may feel more comfortable spending in the months ahead,” said Joanne Hsu, who runs the Consumer Sentiment Survey for the University of Michigan.

And that’s the opposite of what Jay Powell wants.

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