| 8 December 2023, Friday |

US economy will dodge inflation, but uncertainty persist until 2024, say analysts

There is an increasing agreement among economists, including those within the Federal Reserve, that the United States is on track to evade a recession. Nonetheless, a definite confirmation of this prediction is not anticipated until a considerable way into the year 2024.
A recent report from Mint pointed out that if authorities fail to act aggressively enough against rising prices, they could bounce back inflation. Moreover, the additional concern about the delayed effects of the most aggressive tightening in four decades could push the economy into a recession.

The official arbitrator of US downturns, the National Bureau of Economic Research’s business cycle committee, defines a recession as a severe fall in economic activity distributed across the economy that lasts longer than a few months. Once the group examines what might be initially mixed reports and data changes, it can take up to 21 months to proclaim such an occurrence.
When it comes to a soft landing, economists generally refer to a situation where inflation is controlled without triggering a recession or causing major disruptions in the job market.

However, achieving such a soft landing can be quite a challenge. A study conducted by former Vice Chair Alan Blinder, analyzing 11 instances of monetary policy between 1965 and 2022, revealed that four instances saw relatively successful outcomes with stable or reduced inflation. In contrast, the remaining cases resulted in a hard landing, leading to an acceleration in inflation two years later.

Additionally, the report indicates that policymakers at the Federal Reserve are considering the long term. The Federal Open Market Committee, which is responsible for making the central bank’s policies, predicts that inflation will likely reach its target of 2 percent shortly after the year 2025.

However, a true understanding of a stable economy with moderate prices can only be attained when the data for late 2024 becomes available, as achieving this kind of outcome requires time.

Inflationary concerns amid economic uncertainty

The committee forecasts a rate of 4.6 percent by the end of the upcoming year. This rate is two percentage points higher than the long-term average and roughly half a percentage point more than what the market expects. Additionally, the Fed raised interest rates last month to a range of 5.25 percent to 5.5 percent, marking the highest level in two decades. They have also indicated the possibility of further rate hikes later this year.

According to Neil Dutta, the head of economics at Renaissance Macro Research LLC, who envisions a possible “inflationary boom” due to rising oil prices and the potential for high home prices to affect rents, he believes that determining a soft landing can only be done with the advantage of hindsight, as stated in a Mint report.

Moreover, officials who are keen on avoiding the same misstep that the Federal Reserve made in the 1970s also share this cautious perspective. During that time, the Fed prematurely abandoned its efforts to control inflation, leading to a resurgence of double-digit price increases later on.

Furthermore, given that economic data can be unclear during critical turning points and is often revised later, it’s important to note that determining the Fed’s success in real-time might be impossible. Additionally, during extended periods of economic growth, it’s not uncommon to encounter a quarter with negative growth.

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