A US soft landing? Even the Fed doesn’t believe it
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AFTER a string of encouraging data, markets are displaying increasing optimism that the US Federal Reserve might be done with its battle against inflation – and that the US will experience a rare “soft landing”, in which inflation falls back to 2 per cent and the economy cools without dipping into recession.
I can imagine how this could happen, but it requires some extremely positive thinking.
To assess the chances of a soft landing, one must consider three questions. First, will the effects of the Fed’s tightening keep mounting, thanks to lags in monetary policy? Second, once those lags have played out, will the Fed’s stance be sufficiently tight to keep growth in check? And third, does the unemployment rate need to go much higher to bring inflation back down to the Fed’s 2 per cent target?
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