March 22, 2024 | The Federal Reserve Believes The Soft Landing Myth

The Federal Reserve announced that interest rates will remain unchanged.

The chairman, Jerome Powell, seemed confident in his remarks that inflation will come down further, while economic growth gets stronger, and unemployment stays at the current low level of just under 4 percent.

Powell hinted that rate cuts are coming, starting in June with a total of three cuts this year.

Is the Fed thinking that a “soft landing” has arrived?

On Wednesday a confident-sounding Powell brushed aside tricky questions like, “But what if inflation stays too high, will you still cut rates?” by claiming that inflation will come down.

He said: “The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.”

Presumably what he means by “balance” is that there is an equal chance of the Fed getting it wrong by adopting a policy that allows higher inflation as there is of the Fed keeping rates too high and triggering a recession.

But the Fed is never going to admit that out loud, if the Fed leadership even realizes that their chances of getting it right are slim to none.

The stock market hit record highs shortly after the media conference.

The press conference continued the tradition of the Fed demonstrating an astonishing amount of hubris with respect to their belief in their ability to achieve their dual mandate of keeping inflation at 2 percent and promoting maximum growth.

After all, the Fed’s record of achieving a “soft landing” is dismal. There is, instead, a long history of mistakes.  Sometimes the Fed pushed interest rates too low for too long, causing an outburst of speculation, misallocated investments and inflation. In the more distant past the Fed has erred by hiking rates too high just as a recession was starting, triggering a nastier downturn.

Making mistakes is the rule, not the exception. So, our task is to guess which mistake is the Fed more likely to make this time.

The Fed could wait too long and start the rate cuts just as the economy goes into a severe recession, with inflation remaining surprisingly stubborn.

Obviously, the Fed does not want to say or do anything that would commit them to a particular set of actions. But the policy statement contained hints that anticipates three rate cuts of 25 basis points each starting at the June meeting with Fed Funds closing out the year at 4.6 percent.

One important consideration was ignored in the statement and during the discussion on Wednesday. The Fed will be making these important decisions with an election scheduled for November 5. If the Fed cuts rates soon it will look like they are helping the Democrats, allowing Republicans to scream about bias.

However, if the Fed doesn’t cut rates, it will be viewed as helping Republicans, if a recession arrives before the vote.

It will be interesting to watch this Fed as it struggles to prolong the soft landing without pushing inflation higher.

Hilliard MacBeth

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Hilliard MacBeth March 22nd, 2024

Posted In: Hilliard's Weekend Notebook

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