Hard Landing Forecasts: A Missed Mark

The 'hard landing' forecasts for the U.S. economy have not materialized as predicted, with the Federal Reserve's policy adjustments and the labor market's benign deterioration playing significant roles in averting a recession. This article explores how these factors contributed to the avoidance of a hard landing and the implications for future economic projections.

The Federal Reserve's average inflation targeting framework initially led to a delayed tightening of monetary policy. However, the Fed's subsequent actions helped prevent a hard landing. The labor market's benign deterioration, characterized by rapid labor force growth rather than permanent job layoffs, contributed to the economy's resilience. Additionally, the easing of financial conditions, with stock prices soaring and bond yields falling, further supported the U.S. economy's resilience.

The Sahm rule, which typically signals a recession when the unemployment rate rises by 0.5%, may have a higher threshold this time due to the rapid growth of the labor force. This suggests that the Fed's efforts to cool inflation without triggering a recession may be successful.

The Fed's policy evolution will be crucial in balancing the risks of inflation and recession in the future. As the economy retains considerable forward momentum and the labor market deterioration is relatively benign, the Fed may be able to achieve a soft landing, cooling inflation without causing an economic downturn.

In conclusion, the 'hard landing' forecasts for the U.S. economy have proven inaccurate, with the Federal Reserve's policy adjustments and the labor market's benign deterioration contributing to the avoidance of a recession. The potential higher threshold of the Sahm rule and the easing of financial conditions further support the economy's resilience. As the economy continues to show signs of strength, the Fed's policy evolution will be key to maintaining this trajectory.