The Journal. - Inflation Is Down. Unemployment Is Low. Is This a Soft Landing?

Episode Date: November 16, 2023

Inflation has been a big problem in the U.S. economy over the past couple of years. The Federal Reserve has been trying to tamp it down without crashing the economy. WSJ’s Amara Omeokwe explains why a so-called soft landing is coming into view. Further Reading: - Cooling Inflation Likely Ends Fed Rate Hikes  - The Elusive Soft Landing Is Coming Into View  - The Global Fight Against Inflation Has Turned a Corner  Further Listening: - Why a Soft Landing for the Economy Could Be Hard  - Will the Fed Stop Raising Interest Rates?  Learn more about your ad choices. Visit megaphone.fm/adchoices

There's this report that comes out every month called the Consumer Price Index, or CPI. It looks at the price of all kinds of stuff, everything from cars to clothes, and calculates how much inflation there is. And up until recently, the CPI report has been kind of uneventful. But over the last year, as inflation has taken off, the CPI report has become a really big deal. Our colleague Amara Amokwe has been watching it. I actually, just for fun, was looking back, like pre-pandemic,

at when I had to cover CPI. And it was just so routine. Like, even what I it was just so routine. Like even what I wrote was just so like, you know, like just so routine. It was just like, eat your vegetables, write about the CPI report, you know, and now it's like so different.

And then you get to get your popcorn ready. Like here comes the data, here comes the numbers. Yeah, like at 8.30, I'm like, oh, you know, like my heart is like, it's like a big deal now because it's just so closely watched. On Tuesday morning, the latest CPI report came out, and it was a blockbuster. We're incrementally making progress towards the Fed's goals here. And we did get a CPI report that's given this market a lot of cheer, coming in ever so softer than expectations, but enough to really gear up the juice in terms of this market. Ladies and gentlemen, please put your tray tables up and your seat backs in their full upright positions. We're about to land the plane. We're landing on Wall Street.

The report showed good news. Core inflation, which doesn't include volatile stuff like gas and food, was down to 4%, the lowest it's been since September of 2021. The number is giving people hope that the Federal Reserve might be able to bring down inflation without causing a recession, a so-called soft landing. What was your reaction when you saw the numbers? I was surprised, right? Because I talked to several economists leading into the report, and the feeling was this could show that the final part of the Fed's mission to bring inflation down could be really hard, right? And this inflation report, I don't think it necessarily like extinguishes those concerns, but it definitely makes it feel like maybe the Fed can pull off

this thing that people at the start of this year didn't think that the Fed could. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Thursday, November 16th. Coming up on the show, is the fight against inflation almost over? At Air Miles, we help you collect more moments. So instead of scrolling through photos of friends on social media, you can spend more time dinnering with them. How's that spicy enchilada? Very flavorful.

Yodeling with them. Ew. Ooh, must be mating season. And hiking with them. Is that a squirrel? Bear! Run! Collect more moments with more ways to earn. Air Mile. So the big issue affecting the economy over the past couple of years has been high inflation. First of all, why is high inflation bad? Yeah, essentially because it eats into people's purchasing power, right? It makes people feel not as well off.

It is a hardship for people who are trying to afford the things that they need. And it can also be self-perpetuating in a way, right? So if there's elevated inflation in the economy and people don't think that prices are going to be stable, then that kind of feeds into their behavior, that feeds into the wages that they demand from their employers, which in turn can then feed into prices, so prices continue to go higher. So you can just kind of get this spiral. So it's important for prices to be stable and kind of anchored so that you don't have an economy that kind of just kind of spins out of control.

Inflation has been running really hot. It hit 9% last year, the highest rate since the early 1980s. The Fed's goal is for inflation to be around 2%. To try and bring inflation down, the Federal Reserve has been raising its benchmark interest rate, which effectively makes everything from mortgages to car loans more expensive. So the idea being by raising their benchmark interest rate, that raises borrowing costs across the economy. And in doing so, they hope to slow economic activity, cool some of the demand in the economy, and thereby they hope to also cool inflation. So the idea is if it's more expensive to borrow and more expensive to spend, people

will pull back on that and that will help take some of the momentum out of the economy. And if people don't spend as much, then there's less demand and then therefore prices will fall? Not fall, but not rise as quickly as they had been. So you just want that rate of increase to be more gradual. The challenge, though, is that if consumers pull back too much and the economy slows down a lot, we could get a recession and companies might start laying off workers. And so the idea of a soft landing, which the Fed has set as its goal to bring inflation down

without causing like significant job losses and a recession, right? And the big question has been, are they going to be able to pull it off? And a lot of people, a lot of economists thought, no, a lot of economists thought that the cumulative impact of the interest rate hikes would be that we got a recession late in 2023 or 2024.

Why do people think it would be so hard for the Fed to pull off a soft landing? Well, inflation was quite high. It was up around 9% at one point. And these interest rate hikes are aimed at slowing economic activity. That's what they're designed to do. And the impact of the interest rate hikes are not felt immediately. So it's not like the Fed raises rates today and tomorrow, economic activity slows down and employers start to lay people off and all of those things. activity slows down and employers start to lay people off and all of those things,

you know, monetary policy works with a lag. And so it is kind of difficult to know ultimately what the cumulative impact of interest rate hikes will be. You're sort of like pulling this lever of raising interest rates and then that just sort of ripples through the economy, but you don't really know if it's knocking over dominoes that you may not be able to see yet. It's all kind of happening under the surface. Right. You don't know if it's knocking down dominoes and when it's going to knock down dominoes, right? One reason people think a soft landing is so hard is because it's almost never happened before. For instance, in the 1970s, inflation was really high, and the Federal Reserve had to raise interest rates to almost 20% in order to bring it back down. And that

caused a brutal recession. Now there are nearly nine and a half million Americans who can't find a job. And according to Labor Department figures released today, almost two million of them have been thrown out of work since last July when the recession began. This brings us back to Tuesday's CPI report and why people were so excited about it because it's starting to look like that elusive soft landing might actually be in sight. How big of a deal would you say this moment is potentially in this report, this data that we're seeing right now? So my colleague, Nick Timoros, who covers the Fed closely, his reporting suggests that this means that the Fed is done hiking interest rates. And that is pretty significant, right? They, since last year, they had been on this campaign of interest rate hikes. It was pretty historic how fast and how steeply they raised interest rates. They had paused at their last two policy meetings.

But if they are in fact done, that means that they, at least for now, are content with the progress that they've made on cooling inflation. And they feel comfortable enough to say, we can stop for now and see how what we've already done continues to impact the economy. So what's been going on in the economy that's making this possible, that's making it look like a soft landing might actually happen? While inflation has been slowing substantially, we have seen the economy hold up pretty well. And a main driver of that has been the American consumer.

So consumers have really continued to spend in a way that was really unexpected, both because of increasing interest rates, but also because the feeling was that during the pandemic, people were able to accumulate all these excess savings. You know, people got stimulus checks, they got enhanced unemployment. And so economists have said that as a result of that, people accumulated like $2 trillion in excess savings. That, they had theorized, was helping to really fuel this strong streak of consumer spending. But they expected that as people continue to spend that money down and as, you know, the Fed's interest rate hikes translated into employers perhaps pulling back on hiring and maybe laying people off, we would see consumer spending slow.

But Amara says the consumer spending has held up this year, and it's propped up the economy a lot longer than people anticipated. spending has held up this year, and it's propped up the economy a lot longer than people anticipated. And of course, if consumers are spending, that means there have to be employers, businesses, that meet that demand, right? And so that is part of why the labor market has held up, right? As long as there's demand from consumers for goods and services, then employers can continue to hire or at the very least hold on to the workers that they have. So all of those things taken together have meant that the economy has held up pretty well. So we're in this moment where things are looking good. And some economists say that like we're starting to see like a soft landing.

But how do we know that we're not in a moment where just the plane is having a smooth descent before it just crashes right into the runway? How do we know where we are on the approach? Yeah, I mean, that's what's hard. After the break, what could go wrong? Picture this. You finally get to the party, and it's the usual drinks and small talk. Suddenly, you spot something different. The Bold Seagram 13, a 13% cosmopolitan cocktail. You grab a can and take a sip.

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with Uber Eats. Order now. Alcohol in select markets. Product availability may vary by Regency app for details. Even though the rate of inflation is coming down and the job market is holding up, that doesn't mean we're out of the woods. Inflation is coming down and the job market is holding up. That doesn't mean we're out of the woods. Inflation is still higher than where the Federal Reserve wants it to be. Remember, the goal is 2% and the CPI report showed core inflation is about 4%, which means the Fed still has work to do. There is a difference between the Fed no longer raising rates and the Fed cutting rates. That doesn't mean that they won't hold rates here for some time, right? Because where rates are now is still seen as

a restrictive place, right? They're still meant to cool demand, cool the economy. Interest rates that the Fed have are still high, basically. They're still high, right, right. And so we would be having a different conversation if the Fed were cutting rates, right? If they were cutting rates, that would suggest that they felt like inflation was under control and they could move to a more relaxed stance. But they have not said that yet. And I think that's the next question. Like, how long are they going to hold rates here? And when might they feel like, okay, inflation is under control, so such that we can move to a different posture.

Okay, so what could go wrong and knock this potential soft landing off course? One potential risk is if we continue to see consumers really continue down this path of strong spending that they've been on, that is one potential risk that could make it harder for inflation to come to where the Fed would like to see it. And then like a risk on the other side, if we start to see like the labor market deteriorate significantly, right, if we do start to see more layoffs or we do start to see employers really pull back on hiring, then that would also threaten the soft landing scenario, right? Because remember, we want inflation to come down without seeing like a lot of pain in the labor market. So if we started to get that pain, that would then also

threaten the soft landing scenario. And sometimes pain creates more pain. I mean, layoffs in one industry can sometimes lead to layoffs in another, and then it becomes like a sort of a self-fulfilling cycle where layoffs start to cascade across the economy. Right, because it's related, right? Like people start to lose their jobs and they don't have money to spend, right? Then that employer, their sales go down. Maybe they have to lay off workers

because they can't afford to keep them. So yeah, it can be this cycle of pain. So you mentioned earlier that consumer spending is really important for the economy. So what's the data looking like now on that front? Yeah, I mean, like yesterday, we got retail sales numbers that were a little cool. So that's being taken as perhaps one sign that consumer spending could start to slow. And I think in general, economists feel like some of the factors that have been propelling the strong spending are going to weaken. Right. So we talked about those excess savings. At some point, economists expect that people will fully spend down that money so it won't be available out there in the economy anymore.

And there are like various estimates of when that could happen. people will fully spend down that money, so it won't be available out there in the economy anymore. And there are various estimates of when that could happen, but at some point they feel like, okay, that's not going to be propping up spending anymore. And would that be a good thing or a bad thing, though? Because in some ways it seems like if there's weaker consumer demand and weaker consumer spending, that would help bring inflation down. But if it gets too bad, then it could also bring us into a recession. Yeah, and that's it.

That is the heart of the issue, right? We want things to slow, but we don't want them to slow so much that the economy can no longer grow. So it's just like this tightrope that the Fed has been walking really the whole time where they want to see things cool off, but they don't want to see them like totally ice out. When will we know if we've succeeded? Like, will there be a moment

where the Federal Reserve and the U.S. government can kind of just declare victory that inflation is gone and there's no recession and we did it? My sense is it will be either when inflation is at target or when the Fed begins to cut rates. Because if they're cutting rates, that means that they feel like they're comfortable enough with where inflation is, that they can change their posture from sort of this inflation-fighting posture to

let's bring rates to a place they're kind of just neutral. They're not restricting economic activity, nor are they promoting economic activity. They're just kind of there, which is kind of where I think they ideally like to be. That's all for today. Thursday, November 16th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Nick Timoros. Thanks for listening. See you tomorrow.