When Chair Jerome Powell and other Federal Reserve officials gather this week for their latest decision on interest rates, they will do so on the cusp of achieving an elusive “soft landing” — the feat of curbing inflation without causing a deep recession.
File – Federal Reserve Chair Jerome Powell speaks after a Federal Open Market Committee meeting, June 14, 2023, at the Federal Reserve Board Building in Washington. The Federal Reserve wraps up its two-day policy meeting on Wednesday, July, 26, 2023. (AP Photo/Jacquelyn Martin, File)(AP/Jacquelyn Martin)
After the Fed began aggressively raising borrowing costs early last year, most economists predicted it would send the economy crashing as consumers cut spending and businesses slashed jobs and expansion plans.
Yet even though the Fed is poised to raise its key rate on Wednesday for the 11th time since March 2022, to its highest point in 22 years, no one is panicking. Economists and financial traders have grown more optimistic that what some call “immaculate disinflation” — a steady easing of inflation pressures without an economic downturn — can be achieved. Most economists think this week’s hike in the Fed’s benchmark rate, to about 5.3%, will be the last, though they caution that that rate, which affects many consumer and business loans, will likely stay at a peak until well into 2024.
“I would have been not super-optimistic about a soft landing a few months ago,” said Jeremy Stein, a Harvard University economist who served on the Fed’s Board of Governors from 2012 through 2014. “Now, I think the odds are clearly going up.”
Economists at Goldman Sachs, who have sketched a more optimistic outlook than most others, have downgraded the likelihood of recession to just 20%, from 35% earlier this year.
Even economists at Deutsche Bank, among the first large banks to forecast a recession, have been encouraged by the economy’s direction, though they still expect a downturn later this year.
“We have greater resiliency within the economy than I would have anticipated at this point in time, given the extent of rate increases we’ve gotten,” said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist.
Luzzetti points to durable consumer spending as a key driver of economic growth. Many Americans still have extra savings stemming from the pandemic, when the government distributed several stimulus checks and people saved by spending less on travel, restaurant meals and entertainment.
