David Wessel discusses the Federal Reserve's next course of action
STEVE INSKEEP, HOST:
Federal Reserve policymakers meet later this month to discuss what they do next. The central bank is widely expected to raise interest rates after skipping a rate increase at their June meeting. But this raises questions because the Fed has been raising rates to attack inflation, which is now way down, and the Fed would not like to choke off the economy. David Wessel is following this, as he always does. He's director of the Hutchins Center at the Brookings Institution. David, good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: I just saw the news the other day that inflation year on year is down to 3%, which sounds way better than it was. So why would the Fed be talking about rate increases still?
WESSEL: Well, because inflation remains above their 2% target. In June, they penciled in two more quarter-point rate increases this year. They're on track for one more. That would take their benchmark rate to 5.25%. But as Fed officials are fond of saying, they're data dependent. In other words, what they do depends on what the economy does. Some of them think they're going to have to keep raising rates until they're certain inflation has been conquered, but others now believe they've done enough, or nearly enough, to achieve the elusive soft landing.
INSKEEP: Ah, elusive, meaning that you could miss the target here. So what is a soft landing as the Fed defines it?
WESSEL: Well, there's no precise definition, but a soft landing is when the Fed manages to slow the economy gently, but enough to bring inflation down towards its 2% target without a severe recession or a big increase in unemployment. It's in contrast to a hard landing, when they raise rates so much that we get a severe recession, the economy contracts as it did in the early 1980s.
INSKEEP: How would you assess the likelihood of getting that soft landing as opposed to a hard one?
WESSEL: Well, I've changed my mind on that. Six months ago, I would have told you that a soft landing was unlikely. But the incoming data has been very encouraging. Inflation, as you said, has been coming down, and it's expected to continue to come down 'cause rents are falling and kinks and supply chains are being worked out. Meanwhile, the economy, and particularly the job market, has proven very resilient.
So the best case is the Fed decides that it's done enough. It decides to hold off on further rate hikes. Employers cut back hiring without a lot of layoffs. The unemployment rate goes up a little bit but not very much. We get some more encouraging inflation readings. Now, on Wall Street, JP Morgan economists now say that scenario of a soft landing is looking, quote, "more plausible." And Goldman Sachs has lowered its probability of a recession in the next 12 months to just 25%.
INSKEEP: Oh, meaning that the majority case here would be a probability of no recession in the next 12 months, which sounds promising
WESSEL: Right. Now, the problem is it's not a sure thing. A hard landing is still a possibility. If inflation doesn't cooperate, if the job market doesn't cool off, if the Fed is careful and doesn't overdo it, so it raises rates too much, or if there's some really bad-news surprise from Ukraine or something to hit the economy while growth is already slowing, we could end up with that severe recession. But Paul Krugman, the Nobel laureate, put it well the other day. He said, we haven't touched down on the runway yet. A soft landing isn't guaranteed, but it now looks amazingly within reach.
INSKEEP: OK. All right. Everybody make sure your seatbelts are on, and we'll see what happens. David, thanks.
WESSEL: You're welcome.
INSKEEP: David Wessel, director of the Hutchins Center at the Brookings Institution. Transcript provided by NPR, Copyright NPR.