Soft Landing

At the moment, it appears that the Federal Reserve may have accomplished what many thought it couldn’t: a so called-soft landing for the economy, in which inflation is brought under control while economic growth is preserved.

Does the Federal Reserve deserve credit for engineering the soft landing (assuming it occurs), or was it just lucky?  It’s a complex question without a definitive answer yet, and as with many economic questions, the answer varies depending on who you ask.

One camp argues that the reason the Fed’s decision to dramatically raise interest rates did not lead to a recession was largely due to factors beyond the Fed's control.  They believe that the strength of the global economic environment, supply chain improvements, stable energy prices, and geopolitical calm were major contributors to the decline in inflation as the economy grew.

Fed skeptics also highlight the strength of the labor market and productivity gains as contributors to economic stability.  Increased consumer spending, financed by savings and government stimulus checks distributed during the pandemic, also played a significant role.

On the other hand, supporters of the Federal Reserve argue that it deserves a significant share of the credit for engineering a soft landing for the U.S. economy.  In their view, the Fed's strategic adjustments to interest rates and careful communication have been crucial in controlling inflation while maintaining economic stability.

Chairman Powell’s careful communication is also credited with keeping investors calm and stabilizing the securities markets.  His transparent and strategic messaging during press conferences, including the gradual shift towards a more dovish stance with potential rate cuts in 2024, has generally reassured markets and supported economic stability.

The long-term impact of the Fed's policies will provide the clearest indication of whether the decline in the inflation rate concurrent with sustained economic growth was primarily due to skilled management or external luck.  It's plausible that both the Fed's strategic actions and favorable external circumstances allowed both to occur simultaneously.

The full impact of the Fed's actions often takes time to materialize in the economy.  Therefore, a recession caused by the Fed's tightening policies could still be on the horizon.  Additionally, global events and other unforeseen circumstances could still result in turbulence that has the potential to jeopardize the soft landing the Fed has been stiving for.

At this point, however, I am happy to tip my hat to Chairman Powell and his colleagues and to congratulate them on a job well done.