Fed expects ‘soft landing’, but history shows it won’t be easy

The Federal Reserve is hoping to achieve the rarest of economic feats as it goes into full inflation-fighting mode: cooling consumer demand so that prices stop rising, without crushing it so much that it throws the country into recession. .

Although Fed policymakers are counting on finding that elusive sweet spot – known as a soft landing – history shows that US central banks often successfully thread the needle between tight policy and preserving economic growth. fights for.

One of Biden’s favorite economists sees high probability of recession in next 2 years

Recent research by Alan Blinder, a former deputy chairman of the Federal Reserve Board and Princeton economist, identified 11 tightening cycles since 1965, eight of which were followed by a recession. Still, that doesn’t mean a severe recession is guaranteed: either there were five instances of a very mild recession in which GDP fell by less than 1% or there was no economic decline.

Fed Chairman Jerome Powell identified three examples in 1965, 1984 and 1994, when the Fed tightened monetary policy, reduced inflation, and saw no decline in growth.

“It is worth noting that today the economy is very strong and in a good position to handle tighter monetary policy,” he said during a speech in March.

Median projections show central bank officials are confident they can make such a landing: they forecast core inflation to fall to 4.1% at the end of the year, 2.4% the following year, and 2.3% in 2024 , while he believes that unemployment will remain stable at 3.5. % to 3.6% for some time.

Despite this, there are growing fears on Wall Street that the Federal Reserve may inadvertently send the economy into recession as it takes a more aggressive approach to fighting inflation, which is at its highest level since December 1981. Policymakers raised rates by a quarter- percentage point in March, and have since confirmed that a sharp, half-point increase is likely in the coming months, starting with their two-day, policy-making meeting this week.

A man wearing a mask walks past the US Federal Reserve building on April 29, 2020 in Washington DC. (Xinhua / Liu Jie via Getty Images / Getty Images)

Traders are already pricing in at least a 100% chance of a half-point rate hike at the conclusion of the Fed’s May meeting on Wednesday, in addition to at least three more at subsequent central bank meetings in June. July and September, a 50-basis point increase, according to trading tracker CME Group.

By September, traders expect the federal funds target range to be at least 2.25% to 2.5%, up from the current range of 0.25% to 0.50%. A rise in interest rates creates higher rates on consumer and business loans, which slows the economy by forcing employers to cut spending.

Bank of America, Deutsche Bank, Fannie Mae and Goldman Sachs are now among firms that have warned that swift Fed tightening could propel the economy into another recession.

And last week, the Bureau of Labor Statistics reported that the economy unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the US economy was still in the grip of a COVID-induced recession.

Jerome H. Powell, chairman of the Federal Reserve’s Board of Governors, speaks during a confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee on January 11, 2022 in Washington, DC. (Graeme Jennings-Pool/Getty Images/Getty Images)

“The window for a soft landing for the Fed is likely to be closed, as the economy is beginning to sag even before the Fed can take strong inflation-fighting action,” said Danielle DeMartino Booth, Quill’s CEO and chief strategist. Intelligence and former advisor to the previous Dallas Fed chairman. “The last economic pillar standing is the job market, but we are already seeing a weakening in new job postings.”

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Powell has pushed back against concerns that further tightening by the central bank would trigger a recession and maintained optimism that the Fed can strike a delicate balance between controlling inflation without crushing the economy. Nevertheless, he acknowledged the difficulty of the task ahead and said it is “absolutely necessary” for central bankers to restore price stability.

“Our goal is to use our tools to get demand and supply back in sync, so inflation bounces back without a recession,” Powell said. “I don’t think you’ll hear anyone at the Fed saying it’s straight and easy. It’s going to be challenging.”

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