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Key Question as Federal Reserve Meets: Can the Central Bank Pull off a Difficult ‘Soft Landing’?



Chair Jerome Powell and Federal Reserve officials are optimistic about achieving "immaculate disinflation," curbing inflation without causing a recession. (AP File/Jacquelyn Martin)
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WASHINGTON — When Chair Jerome Powell and other Federal Reserve officials gather this week for their latest decision on interest rates, they will do so on the cusp of achieving an elusive “soft landing” — the feat of curbing inflation without causing a deep recession.

After the Fed began aggressively raising borrowing costs early last year, most economists predicted it would send the economy crashing as consumers cut spending and businesses slashed jobs and expansion plans.

Economists Growing Optimistic About ‘Immaculate Disinflation’

Yet even though the Fed is poised to raise its key rate on Wednesday for the 11th time since March 2022, to its highest point in 22 years, no one is panicking. Economists and financial traders have grown more optimistic that what some call “immaculate disinflation” — a steady easing of inflation pressures without an economic downturn — can be achieved. Most economists think this week’s hike in the Fed’s benchmark rate, to about 5.3%, will be the last, though they caution that that rate, which affects many consumer and business loans, will likely stay at a peak until well into 2024.

“I would have been not super-optimistic about a soft landing a few months ago,” said Jeremy Stein, a Harvard University economist who served on the Fed’s Board of Governors from 2012 through 2014. “Now, I think the odds are clearly going up.”

Economists View Moving in Positive Direction

Economists at Goldman Sachs, who have sketched a more optimistic outlook than most others, have downgraded the likelihood of recession to just 20%, from 35% earlier this year.

Even economists at Deutsche Bank, among the first large banks to forecast a recession, have been encouraged by the economy’s direction, though they still expect a downturn later this year.

“We have greater resiliency within the economy than I would have anticipated at this point in time, given the extent of rate increases we’ve gotten,” said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist.

Luzzetti points to durable consumer spending as a key driver of economic growth. Many Americans still have extra savings stemming from the pandemic, when the government distributed several stimulus checks and people saved by spending less on travel, restaurant meals and entertainment.

Indications of Economic Resilience

Hiring has remained healthy, with employers having added 209,000 jobs in June and the unemployment rate declining to 3.6%. That’s near the lowest rate in a half-century and about where it was when the Fed began raising rates 16 months ago — a sign of economic resilience that almost no one had foreseen.

At the same time, inflation has steadily declined. In June, prices rose just 3% from a year earlier, down from a peak of 9.1% in June 2022 though still above the Fed’s 2% target.

Even more encouragingly, measures of underlying inflation have dropped. “Core” prices, which exclude volatile food and energy costs, rose just 0.2% from May to June, the slowest monthly rise in nearly two years. Compared with a year ago, core inflation was still a relatively high 4.8%, though down sharply from 5.3% in May.

Some economists warn that a recession cannot yet be ruled out. The Fed’s rate hikes, they note, have made the cost of buying a home, financing a car purchase or expanding a business much more burdensome.

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