A soft landing is vanishing, but a hard landing isn’t inevitable. So economists now think maybe there won’t be any landing at all.
What kind of surreal ride are we on? It can only be inflation, torment of consumers and curse of presidents.
Are we straining the metaphor here? Absolutely! It’s not even clear what we’re trying to land. An airplane? A spy balloon? A gymnastic twirl? A marlin?
Anyway … In the soft-landing scenario, the Federal Reserve gets inflation down to 3% or less while the labor market stays strong and the economy continues to grow. Everybody wins. Alas, that doesn’t seem to be happening.
A hard landing would involve a recession. The Fed would hike interest rates, its main inflation-fighting tool, by too much, pushing unemployment up and shrinking output. This doesn’t seem to be happening, either.
So the new trendy theory is that there will be “no landing,” which means inflation will stay high, the labor market will remain tight and the economy will continue to grow. The metaphor breaks down, however, because nothing can stay aloft forever. Not an airship, not Simone Biles, and not even inflation.
The data does justify some confusion. The Fed has raised interest rates by 4.5 percentage points since last March, a very rapid pace of monetary tightening that ought to sharply slow the economy and bring inflation down. Yet job growth is almost unbelievably strong, which is of course a good thing, but also a sign the Fed’s interest rate hikes may not be working.
Income and spending growth both came in stronger than expected in January, and an important measure of inflation slightly worsened, instead of improving. “Income, inflation and spending are all too hot for the Fed,” Oxford Economics declared in a Feb. 24 analysis. That’s not what anybody wants. Stocks started the year strong, reflecting hopes that the Fed would tame inflation soon. Now, it doesn’t look that way, and the S&P 500 index dropped 3% for the week.
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President Biden sees a way to spin the tedious, ongoing fight against inflation to his advantage. He boasts about rising incomes and a 50-year low in unemployment, while arguing that remaining challenges underscore the need to stick with his economic plan. “We have made progress on inflation, but we have more work to do,” Biden said in a Feb. 24 statement. “As I’ve long said, there may be setbacks along the way, but we face global economic challenges from a position of strength. We must finish the job in transitioning to stable and steady growth that benefits all Americans.”
Biden makes it sound like a few more years of this, and everything will be in perfect order. But that’s what economists are fretting about. Maybe that gradual improvement in inflation will cease, and we’ll be stuck with inflation of 5% or 6% for the foreseeable future. A month ago, it seemed possible that the Fed might hike rates just one more time at its upcoming meeting in mid March, by a mere one-quarter of a point. But now it looks like there could be two or three more hikes, with a lower-rate environment drifting into the hazy future.
The next employment report arrives March 3. The next big inflation report comes out March 14. Forecasts have been wildly wrong, so nobody really knows if or when inflation will ease and economy will slow enough to appease the Fed.
There will be a landing. Maybe it will be more like a delayed landing than no landing at all. But it won’t fit neatly into the metaphorical box we’re hoping for. High inflation has always come down, but then other things happen. Technological change causes displacement. Bubbles form and burst. Wars distort markets. People and governments take on too much debt. By the time we land this thing, there will be a new metaphor helping us oversimplify another set of problems.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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