Key Takeaways
- Economists are watching whether the Federal Reserve can achieve a “soft landing” by bringing inflation down to its target without tipping the economy into a recession.
- Most economists said a recession doesn’t appear to be on the horizon, as continued economic growth offsets worries about a weakening labor market.
- The Fed’s management of interest rate cuts moving forward could determine whether it can engineer a soft landing and avoid a recession.
Inflation is moving lower, the economy is cooling and the Federal Reserve has begun cutting interest rates. But can the central bank stick the landing?
Economists have said the Fed is on the verge of achieving an elusive “soft landing” in which the central bank is able to bring down inflation without sending the economy into a recession. It’s rarely been done, but some say the Fed is almost there.
“The U.S. economy is clearly not in a recession, nor is it likely to head into a recession in the home stretch of 2024,” said Jack Kleinhenz, National Retail Federation chief economist. “Instead, it appears that the economy is on the cusp of nailing a long-awaited soft landing with a simultaneous cooling of growth and inflation.”
Economy Proving Resilient to Inflation
Recent reports showed inflation was down to 2.2% over the year ending August, well off the highs from the summer of 2022 and closer to the Federal Reserve’s annual target.
After holding interest rates at decades-high levels to relieve price pressures, the Fed is now responding to slowing inflation by cutting interest rates. Central bankers voted to cut the influential fed funds rate by half a percentage point in its September meeting and forecast more cuts are on the way.
Those next steps in the cutting cycle could be crucial in determining whether the economy levels off sustainably or veers into a recession, economists said.
“Current economic conditions can be best described as ‘goldilocks.’ Not too hot, and not too cold,” wrote Torsten Slok, chief economist at Apollo. “The risk with cutting interest rates too much too quickly is that the economy becomes too hot again.”
Recession Chances Low, Despite Labor Worries
Goldman Sachs estimates there is only a 20% chance of recession in the next year. The investment bank noted that the recent weakening in the labor market wasn’t likely to slow economic growth significantly.
Employers created fewer jobs than analysts expected in August, but the unemployment rate also dipped back down to 4.2%. Economists expect those numbers will be similar when September’s unemployment numbers are released on Friday. According to the Federal Reserve Bank of Atlanta’s GDP Now model, the economy is expected to have grown 3.1% despite elevated unemployment.
“The increase in U.S. unemployment since April 2023 mostly reflects strong labor supply and continued expansion, not weak labor demand and a high risk of recession,” wrote Jan Hatzius, chief economist at Goldman.
Wells Fargo wrote that the Federal Reserve is dealing with a tricky situation. While weakness in the jobs market calls for an interest rate cut, strength in retail sales and other economic indicators call for moving more slowly when lowering borrowing costs.
“That divergence perfectly describes why this easing cycle is different and so hard to predict. Historically, when the Fed starts to cut rates, the economy is already in serious trouble,” wrote Wells Fargo economists Tim Quinlan and Shannon Seery Grein.