Stop fretting about the Federal Reserve’s ‘soft landing’

Federal Reserve Chair Jerome Powell. (File Photo: Reuters)
Federal Reserve Chair Jerome Powell. (File Photo: Reuters)

Summary

Jerome Powell has already reached the runway. GDP and job growth are solid, and inflation is down.

There is much talk these days about whether the Federal Reserve can pull off the vaunted “soft landing," reducing inflation to its 2% target without causing a recession. It isn’t easy.

Worrywarts fret over any uptick in the inflation rate, warning that the so-called last mile of inflation reduction could require tougher medicine than earlier ones. Growth worrywarts fret that the real federal-funds rate is rising automatically as inflation falls—and that a Fed that sticks stubbornly to a 5.5% nominal federal-funds rate for too long may produce a hard landing rather than a soft one.

Lost in this debate is something nearly everyone seems to be missing: The Fed has already achieved a soft landing. Something could go wrong in the future, but we’re already safely on the ground.

Start with the “landing" at 2% part. Chairman Jerome Powell emphasizes that the Federal Open Market Committee, or FOMC, would like to see a few more months of very low inflation before declaring victory and embarking on rate cuts. That’s a reasonable attitude.

But look at the recent inflation numbers. Using the Fed’s preferred measure—the deflator for personal-consumption expenditures—the inflation rate over the past 12 months, which in June 2022 was 7.1%, is now down to 2.6%. Almost there. That 2.6% rate, however, includes the 4% annualized inflation rate of the first quarter of 2023, which will fade out of the calculation within a few months. The annualized six-month PCE inflation rate is now almost exactly 2%. In case you’re wondering, the annualized three-month inflation rate is barely above zero. That’s a strong downward trend.

When we turn to the “soft" part, the performance is even better. The U.S. economy grew 3.1% in 2023—well above expectations. The unemployment rate has now been 4% or lower for 25 consecutive months—an historic achievement in its own right. During that period, job creation averaged 317,000 net new jobs a month, almost eight million in total.

I was vice chairman of the Fed when we pulled off the celebrated “perfect" soft landing in 1994-95. What the Fed has achieved this time is more impressive considering where it started and the events since.

When the Fed began to tighten in March 2022, the circumstances didn’t look propitious. The FOMC was late getting started. One reason may have been that real growth in the first half of 2022 was negative. The Fed feared making a bad situation worse. Russia had invaded Ukraine on Feb. 24, sending oil and food prices soaring. Supply restrictions, a legacy of the pandemic, seemed to be everywhere. Unlike the challenge we faced in 1994, which was to prevent a strong economy from boosting inflation, the Fed in 2022 had to bring inflation down quite a bit.

Despite these challenging circumstances, the central bank has landed the economy so softly that some economists are referring to the drop as the “immaculate disinflation." Break out the garlands of roses. How did Mr. Powell & Co. pull off this minor miracle? The great Yankee pitcher Lefty Gomez famously said he’d “rather be lucky than good." The Fed has been both.

On the good luck side, the runup in oil and food inflation peaked around the time the Fed began to tighten. While there have been ups and downs since then, the basic trends in energy and food inflation have been down. Depending on how you measure them, supply-chain disruptions peaked in late 2021 or early 2022 and by now are basically gone. Remember “the Great Resignation," people leaving the labor force in droves? With jobs plentiful, most of those workers have come back, boosting the supply of labor. All these developments were anti-inflationary.

But the central bank also displayed skill. After getting a late start, the Fed made up for lost time rapidly, raising the federal-funds rate more than 500 basis points in little over a year.

Through its steadfast rhetoric and previously earned reputation, the FOMC managed to keep inflationary expectations in check despite PCE inflation that rose above 7% and consumer-price-index inflation that reached 9%. One market-based indicator of this success was that the expected inflation rate implied by 10-year indexed bonds maxed out at about 3%. Another was that wage settlements remained moderate, never reaching 6% despite near double-digit CPI inflation.

This episode isn’t over. Things could still go wrong, and achieving a “soft landing" doesn’t mean that the plane never flies again. But we shouldn’t overlook the resounding success before us: that the U.S. economy has in fact already touched down softly.

Mr. Blinder is a professor of economics and public affairs at Princeton. He served as vice chairman of the Federal Reserve, 1994-96.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App