On the eve of the Federal Reserve’s interest rate decision, the economy may face a new “no landing” situation
As the market anticipates the Federal Reserve to keep interest rates unchanged at the end of its two-day meeting this week, the economy may be heading towards a new financial situation. The US gross domestic product (GDP) grew by 3.3% in the fourth quarter, higher than expected, while inflation remains above the Fed’s 2% target.
Brett House, a professor of economics at Columbia Business School, described the economy’s current state as a soft landing. He praised the Fed for using a ‘Goldilocks’ scenario to guide the economy, creating a balanced economic situation. However, Alejandra Grindal, chief economist at Ned Davis Research, has cautioned that inflation remains above the Fed’s target, potentially leading to a “no landing” scenario where economic growth and inflation are both above trend, indicating an “overheating” economy.
The ongoing issue of inflation since the COVID-19 pandemic has led to a series of rate hikes by the Federal Reserve and an inflation rate that continues to hover above 3%. This has impacted consumers and raised concerns over potential difficulties for those with variable-rate debt.
While prospects of a soft landing continue to look promising, some experts have not ruled out the possibility of a recession. Mark Higgins, senior vice president at Index Fund Advisors, has warned that easing monetary policy too early could lead to greater risks, citing the example of the late 1960s when the Fed’s actions contributed to the entrenching of inflation in the 1970s.
A survey by the National Association for Business Economics revealed that 76% of economists believed the likelihood of a recession in the next 12 months was 50% or less. However, Higgins emphasized that economic cycles are normal and that taking necessary actions to restore price stability is crucial in the long term. The outcome of the Federal Reserve’s decision holds significant implications for consumers, especially in terms of borrowing costs and household budgets.
As the Federal Reserve grapples with inflation and economic growth, the decision on interest rates will play a vital role in shaping the future economic landscape.