This Fed Official Thinks We are In for a Soft Landing

The U.S. so far looks like it might see a rare soft landing for the economy, Federal Reserve Governor Lisa Cook said in an address in Australia on Wednesday.

“In the U.S., what I have seen so far appears to be consistent with a soft landing: Inflation has fallen significantly from its peak, and the labor market has gradually cooled but remains strong,” she said.

Any prediction of a soft economic landing — in which the economy gradually slows, inflation returns to a desired level, unemployment remains moderate, and there is no recession — is always uncertain. That is particularly true when central banks must begin the process of monetary easing, eventually including cutting interest rates and normalizing sales and purchase processes of assets like government and mortgage bonds.

Cook laid out some background of the soft landing, which is the “generally desired outcome.” Easy enough to understand. She added that it might be too soon to say for the current environment, but the Fed has looked at past monetary policy easing over the last 50 years in 13 advanced economies. Soft landings are rare. Typically, central banks were unable to return inflation to target rates — the U.S. target is 2% — quickly enough. When they did bring down inflation, it was accompanied by a recession.

That isn’t to say soft landings are impossible. On average, there is a “smaller preceding policy tightening” when a soft landing is achieved. Also, they’ve been more likely when easing only started as inflation came down close to the target combined with a “relatively firm growth backdrop.”

However, that immediately raises the question of when easing policies would go into effect. Fed Chair Jerome Powell in his congressional testimony earlier in the week said the right monetary policy now is “not just about getting inflation down” but keeping a balance with the labor market. He talked about rates not dropping down to the “very low” levels when inflation was also historically low.

When asked, Powell would not comment on when rate cuts might begin. The potential worry is two-fold. Start the cuts too early and inflation might kick off again. Start them too late, and the economy might tip into a recession, which means forget a soft landing.

Cook also acknowledged the difficulty, saying that “forecasts are subject to considerable uncertainty, and policymakers must consider a range of possible outcomes.” While she might see data suggesting a soft landing, the critical steps of monetary easing haven’t even begun.