Gain Without Pain?

Since the start of the Federal Reserve’s historically aggressive rate hiking cycle in March of 2022, the critical question has been whether this would tip the U.S. economy into a recession with rampant unemployment or whether a so-called “soft landing” could be feasible. Federal Reserve Chairman Jerome Powell even noted at an August press conference that he was convinced their policies to tame inflation would “bring some pain to households and businesses” but were necessary to restabilize the U.S. economy.   

However, November’s CPI and unemployment data paint a much rosier picture for the U.S. economy than what was predicted at the start of the hiking cycle. Inflation now sits just 1.00% above the Fed’s stated target at 3.10%, down meaningfully from when the Fed began tightening and well ahead of policymakers’ estimates from September. Simultaneously, unemployment rates have remained relatively unchanged since the start of the hikes and decreased 0.2% month-over-month in November. With the data looking increasingly favorable on both sides, it appears that the Fed’s desired but once thought impossible outcome of a soft-landing scenario is becoming increasingly likely.   

While the Fed is far from declaring victory, officials are now calling for unemployment to “remain roughly flat” over the next few years, a dramatic change of tune from when economists called for a full-scale recession at the start of the cycle. However, the outcome of a soft landing is all but guaranteed. Several economists still forecast a sharp increase in unemployment, leading to severe recession and rate cuts as early as March of 2024. As we enter what appears to be the last leg of the Fed’s fight against inflation, the exact timing of a pivot to lower rates will be a monumental decision for the Fed, with severe implications for the U.S. economy and the financial markets.