Prominent podcaster Tracy Alloway recently raised an intriguing question on Twitter: What exactly constitutes a “soft landing”? The responses she received ranged from humorous to serious, highlighting the complexity of the topic. Some suggested that a soft landing meant achieving 2% inflation without causing societal collapse, while others proposed a combination of factors such as moderate inflation, stable job market, and no recession. Ultimately, the definition appeared to be subjective, with some even suggesting that it relied on a feeling or collective agreement rather than specific criteria.
While the answers may seem silly or nonsensical, they hint at a growing optimism among experts. This optimism may not have immediate consequences, but it has the potential to influence the behavior of Federal Reserve officials. TS Lombard’s Dario Perkins explores this shift in sentiment, noting that central banks are now more cautious and willing to pause their tightening policies, even in the face of higher inflation. This change can be attributed to a shift in personal incentives, wherein central bankers envision themselves as the heroes who successfully prevented a disastrous outcome. A soft landing represents the pinnacle of independent central banking achievements, and central bankers are eager to hold onto this dream.
Perkins suggests that the recent economic cycle offered conditions that made a soft landing attainable. Despite its peculiar nature, characterized by pent-up demand, supply-side imbalances, and varying sector impacts, the margins for achieving a soft landing are delicate. The challenge lies in minimizing job losses and maintaining demand without causing adverse effects on different sectors of the economy. Monetary policy, though powerful, needs to be applied carefully to avoid exacerbating issues like labor market mismatches.
Former Bureau of Labor Statistics analyst Joey Politano shares the optimistic view that the worst of the inflationary episode may be behind us. Monthly growth in core services inflation, a highly cyclical aspect of inflation, has shown a downward trend, providing a glimmer of hope. While the Federal Reserve acknowledges that it still has work to do in combating inflation and anticipates a rise in unemployment, its economic projections paint a picture more aligned with a soft landing rather than a hard landing.
Businesses are also growing more confident that the worst of inflation is over. Consequently, attention has shifted to the possibility of a future rate cut by the Federal Reserve. By observing declining inflation and predicting a mild recession, officials might seize the opportunity to shift their focus from tightening to stimulating the economy. The idea is to use interest rate cuts to facilitate a “soft landing” or even avoid any negative impact altogether.
Not everyone is convinced, though. JPMorgan’s economic research team remains skeptical, suggesting that conditions supporting the case for a soft landing may ultimately result in some damage. They argue that global supply disruptions and changes in inflation psychology could limit the extent of the inflation decline. Additionally, the gradualist approach taken by central banks to tackle inflation could reinforce negative inflation expectations, leading to less favorable outcomes as the economic expansion continues.
Perkins, who admits to being critical of central banks, encourages us to consider things from a central banker’s perspective. If a central bank successfully tames inflation and avoids the predicted recession, particularly in a climate reminiscent of the 1970s, it would serve as a powerful validation of independent central banking. It is understandable why central banks are eager to avoid any missteps and strive to take credit for the positive outcome. Even if the prospect of a soft landing was always feasible, central banks will undoubtedly want to be acknowledged for their part in it.
In conclusion, it is impossible to predict the future with certainty in the field of economics. However, one thing is certain: when the parameters are wide-ranging and subjective, almost anyone can claim to have been correct in their predictions.
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