Why We’re Still Fretting Over the Fed’s ‘Soft Landing’

Cautious Optimism

It might be a new year, but we’re still hoping for the same “soft landing” by the Federal Reserve.

This would be achieved by reining in inflation without limiting economic growth so much that we dip into a recession. It’s a delicate balance, and with inflation on the path towards the Fed’s 2% target, hopes remain high. But it’s not yet done and dusted.

Richmond Fed President Thomas Barkin, who is a voting member on the Fed’s main monetary policy body, the Federal Open Market Committee, recently signaled cautious optimism over soft landing. However, he also emphasized the challenges ahead.

Rate Hike Possibilities

Barkin and other Fed officials have acknowledged the progress made, but maintain it’s too early for a victory lap. For example, the Fed’s preferred measure of inflation — core PCE , which strips out energy and food prices – has fallen to the magic 2% target area when looking at a six month horizon. But year-over-year, it’s still above 3%, hammering home once again that we’re just not there yet.

Rate hikes remain on the table, Barkin said this week, even as the FOMC’s latest consensus projections opened the door for as many as three rate cuts in 2024.

The market, for its part, is predicting rate cuts this year, starting as early as March, according to the CME FedWatch tool .

Risks Ahead

In his speech, Barkin likened the situation to a pilot guiding an aircraft toward a smooth landing, highlighting four risks for a potential soft landing:

1.    “Run out of fuel”: Economic growth could slow or reverse.

2.    “Unexpected turbulence”: Unforeseen economic or geopolitical events could negatively impact promising trends like slowing inflation.

3.    “Approaching the wrong airport”: Inflation may remain stubbornly above the Fed’s 2% target, despite restrictive policy.

4.    “Delayed landing”: Demand could remain unexpectedly robust, fueling further inflation.

Fed officials, like most investors, are hoping for clear skies ahead. But until the runway is reached, it appears the Fed is keeping all of its options on the table. That’s it from the flight deck for now.

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