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Analysis | A soft landing is in sight, but can the Fed sustain it?

Remark

If the last few weeks are any guide, the much-coveted soft landing of the economy is in sight. But even if the perfect scenario presents itself, that won’t stop policymakers at the Federal Reserve from squandering the opportunity.

Take a look at the almost fairytale sequence of economic data released since the beginning of the month: Inflation has subsided at both the wholesale and consumer levels; median hourly wages are moderate to lay the groundwork for alleviating price pressures going forward;(1) and retail sales have always been decent. The latter development is crucial. To secure a soft landing, policymakers need to keep consumer spending – the engine of the US economy – just long enough for inflation to die down and central bankers to reverse interest rate hikes.

And it floated. The value of total retail purchases rose 1.3% in October from the previous month, the highest since February, according to data from the Commerce Department released Wednesday. Control group sales — a cleaner measure of the underlying signal that excludes food services, car dealerships, building supply stores and gas stations — rose 0.7%, well above economists’ average 0.3% expectation in a Bloomberg survey.

Central bankers fought the worst inflation in 40 years by raising the federal funds rate to the highest absolute levels since the 2008 financial crisis. Higher interest rates should curb demand, and history shows that such efforts almost always lead to recessions. But there is a lingering hope that this time may be different.(2) Understandably, many traditional economists and market participants have dismissed that view as naive, and there is still a strong case that the doomsayers will ultimately be proven right posed. Still, even the most starry-eyed optimists couldn’t have written a more perfect set of macroeconomic data than the one so far in November.

Of course, there are some important caveats to keep in mind. First, strong consumption is not necessarily broad-based. The surge in recent retail sales came in a significant part from online and other non-store retailers, and it’s likely that it was Amazon.com Inc.’s Prime Early Access sales. was the figures of the control group in the latest retail sales report. On the other hand, brick-and-mortar retailers such as major retailers and home improvement suppliers are experiencing notable weakness. For more, look no further than Target Corp., which said in an earnings report Wednesday that its customers are pulling out, leading to a 13% drop in inventory. Walmart Inc., which also reported earnings this week, posted better results, but perhaps not for the most encouraging of reasons: It owes much of its recent success to bargain hunters pressured by inflation and robust food retailing. Macy’s Inc. raised its profit forecast for the year on Thursday. But the low-end outlook expects sluggish sales trends and high promotions to pick up in January, while the more optimistic outlook expects a return to 2019 levels.

Then consider that this is only one month of good data. This is especially true in the area of ​​inflation, where central bankers have been fooled a few times by sudden improvement, only to see inflation accelerate again. A good month does not make a trend. In addition, there were some technical issues in the latest consumer price index, which benefited from a quirk in the medical care sub-index that clearly makes the numbers look better than they otherwise would be. Aside from that, the numbers certainly improved, but not enough to warrant an overall reassessment of the interest rate policy path.

Finally, there are the famous “long and variable lags” of monetary policy. Traditionally, many economists believe that the maximum impact of rate hikes comes 12 to 24 months after the Fed actually raises interest rates, which could indicate that trouble is just around the corner whether or not inflation dies down and the Fed changes course now . Because of that way of thinking, the damage is already baked in. There is a counter-argument that policy transfer is faster these days because the Fed has made managing expectations an explicit part of its strategy. Well before the Fed hiked rates in March, government bond yields and mortgage rates were rising rapidly. That’s a compelling argument, but the jury is still out; in fact, policy backlogs remain a great mystery.

But if inflation improvements become an undeniable trend, chances are the Fed will squander the soft landing. That’s a big “if” of course, and what does irrefutable actually look like? The haziness surrounding that question could mean that policymakers are unwittingly pushing the country into recession while waiting for confirmation that inflation has really been conquered. Therefore, a soft landing still seems like a bit of a gamble, but data from the past few weeks has significantly moved the odds in the right direction.

More from Bloomberg’s opinion:

• New gauge of inflation expectations has bad news: Jonathan Levin

• Auto industry is currently the best hope for the economy: Conor Sen

• Despite the good news, inflation is not dead yet: editors

(1) The trajectory of average hourly earnings — using a quarterly annualized measure to smooth out month-to-month volatility — shows earnings inflation around 3.9%. The Fed would probably like to see trend wage growth of about 3.5% or less, assuming an inflation target of 2% and a return to about 1.5% productivity growth.

(2) Bad things always happen when you say those words.

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg journalist in Latin America and the US, covering finance, markets, and M&A. Most recently, he served as the company’s headquarters chief in Miami. He is a CFA charterholder.

Leticia Miranda is a Bloomberg Opinion columnist on consumer goods and retail. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.

More stories like this are available at bloomberg.com/opinion

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