The case for a soft landing

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Ethan Wu (0:36)

Thank Pushkin.

In the past 18 months, we've had this very fun debate in financial markets. Is the economic landing going to be hard, or is it going to be soft? And this matters, right? When you have high inflation and high growth, the Central Bank, the Federal Reserve, they raise interest rates, brings down both inflation and growth. But which one does it bring down first? Do we get inflation back to that 2% target without a catastrophic crash in growth, or does that crash in growth come first, and then bring the inflation down? It really matters which way it goes. And it looks more and more like we're heading toward the better version of that, the soft landing, inflation coming down gently without growth crashing. Today on the show, we discuss three indicators for a soft landing and just one against.

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined as ever on Tuesdays by hard landing expert, Katie Martin, who, as I understand, has been falling off walls, bikes, buses, trains, all forms of transportation.

Katie Martin (1:46)

People seem to find it very funny when bad things happen to me. There was a time I cycled into a canal that people thought was hilarious and I did not. That's for a whole other episode. Landings, yes, I fell off a climbing wall in January. That hurt quite a lot because I broke my ankle.

And then a few weeks ago, I was distracted by a really nice dog while I was running and I fell over and hurt my knee. So I know about landings, yes.

Ethan Wu (2:12)

These are all stories in which I think you look good, though, because on the one hand, you're doing the trendy sport that is rock climbing. On the other, you're looking at a cute dog, which, I mean, that makes you really the victim in that story.

Katie Martin (2:23)

I just need to fall over less, I think, generally.

Ethan Wu (2:26)

Today, though, Katie, we are not talking about your hard landings. We are talking about the US economy's soft landing, which looks more and more like it could be coming. And today, we've got three indicators that suggest that it may indeed be coming, and just one reason for a little bit of caution. Katie, I think we have to start with inflation, right? Landings are sort of all about inflation. Usually, what happens in a cycle is the economy gets overheated, inflation is running hot, and growth is running hot. So the central bank needs to raise interest rates to lower demand. That has a tendency of bringing down both inflation and growth, and the question is, do you get inflation back to a target, something like 2% without a really devastating downturn in growth?

And I think the most important point of progress there is where's inflation, because that's ultimately what you're trying to achieve if you're the central bank. And man, it's fallen quite a bit. People will have heard the headline number in the US, 3%. A lot of that reflects energy prices, which have come down in quite a big way. But I think one interesting way of looking at it, Katie, is you look at the median CPI component, right? The CPI, the Consumer Price Index, it's all these different prices. What's the very middle one, right?

The middle CPI component was 7.9% in February.

More recently in June, it's come down from 7.9% to 4.4%, which is not 2%, but that's a lot of progress.

Katie Martin (3:47)

Yeah, it doesn't matter where you are on the kind of long running argument about whether the Fed is going to nuke the economy. You cannot get around these inflation numbers. Somehow, they've actually managed to pull this off. They've managed to get inflation much, much closer to target, pull it right down. We can argue about whether that was really them or whether it was something else. But anyway, the point is inflation has come right back down just as the Fed has finished with more than 5% points of interest rate rises. It might have one more to come, but let's see about that. This has all managed to happen without crashing the economy.