The aircraft is not yet on the ground, but the approach has been uneventful so far.
As tired as the metaphor may be, a “soft landing” is the best possible outcome of the Federal Reserve’s belated efforts to defeat inflation. And the latest data suggests it could be happening.
The Fed will announce its next interest rate move on December 13, and there’s a good chance it will slow the pace of interest rate hikes with a half-point increase. That would follow four straight three-quarter point hikes, one of the most aggressive tightening efforts in Fed history.
The Fed is trying to bring down inflation, which peaked at 9% annualized in June. The inflation rate is now 7.7%, and likely falling. The next set of numbers will be released on December 12, a day before the Fed’s rate hike announcement, and economists believe inflation for November will fall to around 7.3%.
Economic forecasts aren’t always right, but there’s disinflationary evidence everywhere. Average U.S. gasoline prices fell to $3.32 a gallon from $3.80 a month ago and a high of $5 in June. Natural gas prices, which drive winter electricity and heating costs in much of the country, are down 34% from their peak in August.
Rent, the largest part of many household budgets, has risen more than income. But that could eventually turn around. The rent index observed by Zillow fell from September to October for the first time since 2020. Home values are also turning after an epic two-year rally, with the Case-Shiller home price index falling for three consecutive months . The last time this happened was at the end of 2011. Eventually housing affordability will improve.
The Fed reduces inflation by using rate hikes to slow economic growth, so demand cools and prices fall. But there is a substantial margin for error, and if the Fed increases too much or too fast, it will not just slow the economy, it will cause a recession. And recessions, almost by definition, cause the kind of disinflation we’re seeing now in energy and rents.
So, are prices moderating because we are in a recession or heading into a recession? It doesn’t look like that now. Employment remains solid, with an extremely low unemployment rate of 3.7%. The stock market showed some life after hitting a low for the year in October. Bank of America says holiday spending could be a little soft, but that’s partly because shoppers are spending less on goods and more on services, in a return to more normal pre-COVID spending habits. “Consumer spending is slowing but not renewing,” B of A said in a Dec. 8 report.
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Consumer confidence has even improved, with the latest Univ. of the Michigan index 4% higher than it was in November. The improvement in inflation was partly responsible. Consumers are also upbeat about economic conditions, suggesting they continue to feel strong job security.
President Biden might have wished these trends had been more clearly visible a few months ago, as better economic prospects in late summer and early fall could have helped his Democratic party retain the House. representatives in the November midterm elections. Instead, Republicans took the House by a narrow margin. But Biden still ends the year strong, and there are more than a few economic data points.
The Democrats’ victory in the Senate in the December 6 runoff election in Georgia effectively gives them an additional seat. The Dems knocked down a seat in Pennsylvania and defended all the others, a performance far better than most forecasters expected. The Democratic Senate will be an important bulwark against a Republican House eager to do damage to Biden over the next two years. Arizona Sen. Kyrsten Sinema shook things up this week by switching from Democrat to Independent, but that doesn’t seem likely to change Democrats’ control of the Senate or in any way harm the government. Biden’s agenda.
The lame Congress, still controlled by Democrats until the start of the next session in January, has just passed a gay “respect for marriage” law, which Biden will sign into law. He got a few Republican votes, allowing Biden to now claim three major bipartisan laws enacted under his tenure, including last year’s infrastructure bill and the CHIPS+ law he signed into law in August. Biden campaigned as a pragmatist who could work with Republicans on necessary legislation, and he can plausibly claim to have upheld his bipartisan claim.
Many economists still believe that the economy will slide into a recession in 2023. A “hard landing” would be a brutal recession with a sharp rise in unemployment and all the problems that come with it. But companies may be reluctant to cut staff, even if profits suffer. Many companies that have struggled to fill vacancies might be reluctant to cut payrolls if they don’t think they can get needed workers back during a recovery. There might be layoffs in a soft landing, but in this scenario a recovery would be underway by 2024 – and the metaphor would shift from landings to takeoffs.
Rick Newman is a senior columnist for Yahoo finance. Follow him on Twitter at @rickjnewman
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