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As the Federal Reserve concludes its two-day meeting, economists express concerns over the possibility of a ‘no landing’ scenario, suggesting that the economy may not experience a smooth transition but rather continue to grapple with above-trend growth and persistent inflation. The Fed, grappling with the delicate task of managing economic growth and inflation, has aimed for a ‘Goldilocks’ scenario, threading the needle to achieve a soft landing.
Recent economic reports revealed a robust 3.3% growth in Gross Domestic Product (GDP) in the fourth quarter, exceeding expectations and reflecting a solid job market and strong consumer spending. Despite this, inflation remains above the central bank’s 2% target, fueling concerns of a potential ‘no landing’ outcome.
Alejandra Grindal, Chief Economist at Ned Davis Research, defines the ‘no landing’ scenario as one of overheating, characterized by above-trend growth and inflation. Inflation has been a persistent challenge since the Covid pandemic, prompting the Fed to respond with interest rate hikes to curb rising prices. While inflation is gradually receding, the current annual rate stands at 3.4%, still above the targeted 2%.
The impact of a ‘no landing’ scenario extends to consumers, placing additional strain on household budgets, particularly those with variable-rate debt such as credit cards. However, some experts suggest that recent progress in lowering inflation rates might provide the Fed with an opportunity to consider interest rate cuts later in the year, potentially achieving a sustained soft landing.
Economics professor Brett House from Columbia Business School notes that the soft landing appears to be more or less achieved and may continue, bringing potential relief to consumers facing high borrowing costs for mortgages, credit cards, and auto loans.
On the flip side, concerns linger about the risk of a recession, with some experts cautioning against the Fed loosening its policies prematurely. Mark Higgins, Senior Vice President for Index Fund Advisors, highlights the importance of managing inflation risks, drawing parallels with the late 1960s when inflation became entrenched due to a failure to act decisively.
As the Fed navigates economic complexities, the challenge remains in finding the right balance to sustain growth, control inflation, and avoid potential pitfalls that could lead to a hard landing or recession.