Despite a weak October jobs report, other strong economic data has maintained hopes that the Fed will achieve a soft landing—that is, slow the economy enough to bring down inflation without causing a recession. However, experts say it’s too early to call the journey complete.
“I think they're on track to do this, but I don't think you can declare victory just yet,” said BOK Financial® Chief Investment Officer Brian Henderson. “The unemployment rate is still low, even though jobs are being added at a slower pace than before. Meanwhile, financial markets are at all-time highs. I think you've got to be optimistic about the path that we're on up to this point, even though soft landings are relatively rare.”
On Nov. 7, the Federal Open Market Committee (FOMC) continued the path towards a soft landing by cutting the Federal Funds rate by 25 basis points (0.25%) to a target range of 4.5 to 4.75%. This is the overnight interest rate that banks charge each other to borrow money. Other short-term interest rates—such as the interest charged on car and credit card loans, or the rate that money market funds pay to their investors—fall as the Federal Funds rate drops (and increase when the Federal Funds rate rises).
Fed no longer considered ‘behind the curve’
This is the second time that the FOMC has cut rates this year, after making a 50-basis point (0.50%) cut in September. Henderson believes that the FOMC will cut rates by another 0.25% at its Dec. 18 meeting, though the likelihood of them cutting then has declined somewhat since a month ago, given the strength of most of the recent economic data. This data has also has helped dispel the idea that the Fed is “behind the curve” in lowering rates, as some feared leading up to the Fed’s September rate cut, Henderson noted.
However, unlike in September, the FOMC entered its November meeting on the heels of mostly positive economic news released the week before. On Oct. 30, the Bureau of Economic Analysis (BEA) reported that gross domestic product (GDP) grew by an estimated 2.8% in the third quarter, only slightly less than economists’ projections. Then, on Oct. 31, the Personal Consumption Expenditures Price Index (PCE) showed that inflation was 2.1% year-over-year in September, extremely close to the Fed’s 2% target. Core PCE, which excludes food and energy prices, was higher at 2.7% year-over-year for the month. On Nov. 1, the jobs report for October showed weakened job growth—with only 12,000 jobs added, the lowest number since December 2020—but that may be at least somewhat due to the effects of Hurricanes Helene and Milton and manufacturing strikes.
Will there be a true soft landing?
Until the Federal Funds rate is down to a neutral target range, estimated to be around 3% to 3.5%, it won’t be possible to say whether the Fed has achieved a soft landing, Henderson said. “If the unemployment rate is less than 5%, we're close to 2% on inflation and the Fed has managed to get the Federal Funds rate back to a neutral rate, that’s when we'll know,” he explained. Given that the Fed doesn’t project reaching this neutral rate until late 2025, that means that the jury will still be out on a soft landing until then, too.
If that does happen, the Fed will have managed to accomplish the first soft landing in more than 20 years—and even the 2000 landing only has been called “softish.” The last time the Fed achieved what has been called a “perfect” soft landing was in 1995.
In the meantime, there are some potential issues in the economy. So, while Henderson is optimistic for a soft landing, he doesn’t think it’s a given. One challenge is the high cost of living, which is putting pressure on wages.
“You can see it in the union strikes that have occurred,” he explained. “As contracts are coming up for renewal, workers are looking for their earnings to catch up to the higher cost of living. That has a ripple effect across many sectors of the economy.”
This ripple effect could make it harder for inflation in the services sector to stay under control, as wages make up a large portion of businesses’ expenses in that sector, he noted. And so, while PCE is the lowest it has been since February 2021, inflation is still a figure to watch closely going forward, especially as the Fed continues to lower rates.
“What concerns me are the challenges with affordability, particularly for houses and cars,” Henderson said. “The average person still hasn’t seen their real income rise as quickly as it has gotten more expensive to purchase the same basket of goods. The poster child of that is how much home prices have risen.”
However, at the same time, the number of vacancies in the job market has become more balanced with the number of job seekers, which should help alleviate some wage pressure. “Altogether, I don’t see inflation turning up considerably,” Henderson said. “I think the economic data we've had at this point gives the Fed time. There's no rush to have to get to a neutral Federal Funds rate right away.”
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