The Federal Reserve, starting in early 2022, is raising interest rates to ease inflationary pressures without causing the economy to contract, an ideal scenario that some economists call a “soft landing.” A soft landing is defined as when the Fed is able to slow down the economy enough to curb demand and lower inflation but not so much as to cause a major downturn and a large increase in unemployment. With inflation falling and economic output still growing, the likelihood has improved that the Fed can pull off the feat.
History suggests that a soft landing is almost impossible to achieve. Back in 1994-95, the Federal Reserve was able to perform a soft landing. The Fed doubled the federal funds rate to 6% and managed to slow down economic growth without sending the economy into recession. However, the tighter credit did have adverse consequences. It caused considerable losses in the bond market and contributed to the bankruptcy (1994) of Orange County, California. The rise in interest rates also forced Mexico to seek a bailout from the United States and the International Monetary Fund.
Recent US economic data shows that the economy may be on track for a soft landing. Oct retail sales fell -0.1% m/m, a smaller decline than expectations of -0.3% m/m. Also, Oct retail sales ex-cars unexpectedly rose + 0.1% m / m, stronger than expectations of a -0.2% m / m decline. Meanwhile, Oct CPI ex-food and energy eased to +4.0% y/y from +4.1% y/y in September, better than expectations of no change at 4.1% y/y and the smallest increase in over two years . Also, October PPI ex-food and energy decreased to +2.4% y/y, from +2.7% y/y in September, weaker than expectations of no change at +2.7% y/y and the smallest year-on-year annual increase. in 2-3/4 years.
The resilience of the US consumer has surprised many analysts, causing them to rethink their recession forecasts, with some analysts encouraged about the prospects of a US soft landing. Comerica Bank’s chief economist said, “Consumer spending will continue to grow in 2024 but at a modest pace. The economy has a good chance of returning to a more normal rate of inflation and rate of growth without slipping into recession.”
It remains to be seen whether consumer spending will hold, given a cooling labor market, continued inflation and higher borrowing costs. Target ( TGT ) reported this week that sales declined for a second straight quarter as customers curbed spending in some discretionary categories. Also, Walmart (WMT) today said there was a “sharper decline” in sales in the last two weeks of October and that they are “more cautious about the consumer than 90 days ago at this point.” Still, Target CEO Cornell said it sees “great resilience” in the face of mounting consumer challenges. Also, the chief international economist of ING Financial Markets said that recent US economic data “feeds the soft landing with moderate pressures and resilience in activity.”
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