Industrial Forex: A soft landing is far from certain, and the Federal Reserve is expected to adopt delaying tactics

A growing number of people, including Federal Reserve insidersIndustrial foreign exchangeEconomists predict that the United States will emerge from recession, but the answer to that question will not be determined until 2024.

Federal Reserve Chairperson Jerome Powell said he expected the central bank to guide the US economic expansion while achieving its target of 2 per cent inflation, but that task would be challenging. On the one hand, a failure to do enough to address price pressures could lead to a rebound in inflation, which would require tougher measures later. There is also a risk that the lagged effects of what is already the most aggressive tightening in 40 years could tip the economy into recession.

"Unfortunately, I don't think the outlook for these issues will be clear for at least two quarters, although the fact that inflation is falling is buying the Fed some time for now," said Jonathan Millar, a senior economist at Barclays Capital Inc."The Fed seems to have recognised earlier than the market that the path to a soft landing is far from certain."

The Business Cycle Council of the National Bureau of Economic Research, the official arbiter of American recessions, defines a recession as a significant decline in economic activity across the economy that lasts for more than a few months. Once the agency has dealt with initially potentially mixed reports and data revisions, it can take up to 21 months to declare such an event.

While there is no formal definition of a soft landing, most economists believe that it is one in which inflation slows without a recession or serious damage to the labor market. The path is not easy. A study by Alan Blinder, a former vice chairperson of the Federal Reserve, of 11 monetary policy tightening episodes between 1965 and 2022 found that four of the outcomes were near-successful, with stable or low inflation, and the rest were hard landings, or inflation picking up again two years later.

Richard Clarida, vice chairperson of the Federal Reserve from 2018 to 2022 and now a global economic adviser to Pacific Investment Management Co., said, "There are risks on both sides right now." "I think,We won't have a pretty good idea of this until next spring”。

Bloomberg economist Anna Wong says that on the recession front, a number of indicators point to a possible cyclical peak in July 2022. The most prominent counter-indicator is the employment data - there has been a lot of talk over the past few months about a big downward revision that actually threatens to turn the non-farm payrolls data negative. But we won't know the "real" numbers for 2022 until next year, and we won't know what the "real" numbers look like for 2023 until 2025.

Federal Reserve officials are observing a longer cycle.The Federal Reserve's FOMC forecasts that inflation could reach its 2% target soon after 2025. But if these projections prove prescient, the contours of a dovish economy and stable prices will be very clear in the data later next year or later.The committee expects interest rates to remain at a higher level for a longer period of timeThey expect interest rates to reach 4.6% by the end of next year, two percentage points above the long-term trend and about half a percentage point higher than market expectations. The Federal Reserve raised its rate range to 5.25% - 5.5% last month, the highest level in 20 years, and hinted that it could raise rates again this year.

The latest economic data exceeded economists' expectations, with unemployment at 3.5 percent at its lowest level in decades and a key measure of underlying inflation posting its smallest increase in more than two years in July.Although this is conducive to a soft landing, it does not necessarily rule out the possibility that the economy will overheat further, causing prices to rise again.

Neil Dutta, head of economics at Renaissance Macro Research LLC, said: "I don't think you can know if there's going to be a soft landing if it's not an afterthought." He believes that as oil prices continue to climb, high house prices could push up rents and there could be an "inflationary boom". His concerns are shared by policymakers eager to avoid a repeat of the 1970s, when the Federal Reserve prematurely eased its efforts to curb inflation, resulting in prices rising again at double-digit rates. "The worst outcome for everybody, of course, is not to deal with inflation, not to deal with inflation now," Mr. Powell said in July.

Because economic data tend to look mixed at turning points, then corrected, and it is not uncommon to see a quarter of negative growth during a long expansion, it is impossible to determine in real time whether the Fed is succeeding. After all, the US experienced two consecutive quarters of contraction in the first half of 2022 - which usually constitutes recessions in other economies. History offers similar guidance. During the six months that would later be defined as the 2007-2009 recession, FOMC participants had predicted modest growth in 2008. Ben Bernanke, then Fed chairperson, initially dismissed the broad impact of subprime mortgages on the economy.

Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed economist, worries that the Fed is going too far, saying: "In most cycles, even at the tipping point, we're not very sure. Let's have some patience. The only hope for a soft landing is that they stick to that patience."