US Economy Set For 'Soft Landing' As Economists Eye Fed Rate Cuts

The roller-coaster ride of inflation in recent years has left economists hopeful for a soft landing of the US economy and potential Federal Reserve rate cuts, despite challenges in forecasting during the post-pandemic period. This was a key sentiment at the three-day annual economics profession meeting that concluded in San Antonio, Texas, on Sunday.

What Happened: Many economists attending the meeting admitted that they failed to predict the inflation surge to multi-decade highs and erroneously believed that a recession was required to bring it back down, Bloomberg reported.

"We didn't really understand why inflation spiked in the first place," confessed University of Michigan professor James Hines.

"We maybe shouldn't be surprised it came down faster than we thought."

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Inflation fell from a peak of 7.1% in June 2022 to 2.6% in November, bolstering hopes among economists that it will return to the Fed's 2% target without an economic downturn. This would be positive news for President Joe Biden, who has faced declining poll numbers due to concerns over the cost of living.

"The supply side of the economy has come back in a much more supportive way than most people had anticipated," Eberly said.

"That is the most hopeful part for getting a soft landing because it means you can maintain strong growth without putting upward pressure on inflation."

Economists at the American Economic Association meeting also believe that the easing price pressure will enable the Fed to lower interest rates, albeit not as rapidly or as soon as investors anticipate. Traders in the federal funds futures market are wagering that the first Fed cut will arrive in March, with the central bank reducing rates to around 4% by year’s end.

However, potential risks include a geopolitical shock, such as a widening Middle East conflict that could lead to soaring oil prices. This could destabilize fragile inflation expectations and risk a repeat of the inflationary spiral witnessed in the 1970s, warned Ricardo Reis of the London School of Economics.

Why It Matters: The Federal Reserve’s meeting notes from December ignited debates among financial experts about the possible speed and extent of future rate cuts. Slowing inflation was acknowledged as a positive sign, but its sustainability remains a key factor.

The Fed had kept rates steady, signaling potential cuts for 2024. This announcement sparked a rally in the stock market.

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