This post is related to yesterday's post where I showed that the low inflation like we had the last six months is usually followed by another six months of low or moderate inflation. It also seems like a "soft landing" and a "Goldilocks economy" are the same thing or very close.
The first article is from yesterday's (Feb. 9) print edition of The WSJ. See The
Fed Now Has a Good Chance at a Soft Economic Landing: Inflation is
falling fast. If the monetary hawks aren’t careful, they could fly into a
recession by Alan S. Blinder. Excerpts:
"six months of quiescent inflation data doesn’t prove that the
inflationary dragon has been slain. True again. But six months is also
too long a period to be dismissed as a mere blip in the data. The dragon
is, at minimum, seriously wounded."
"a sizable part of the sharp decline in inflation came from falling
energy prices. Between the first and second halves of 2022, the “core”
version of CPI inflation—which excludes food and energy prices—dropped
only 2.3 points (from 6.8% to 4.5%), and the core version of PCE
inflation fell only 1.5 points (from 5.2% to 3.7%). But focus your
attention, as the Fed does, on that last number. A rate of 3.7% is only
about another 1.5-point decline in core PCE inflation away from the
Fed’s 2% target."
"My point isn’t that inflation has definitely been vanquished, and the
FOMC should declare victory. Rather, it’s that pausing rate hikes now is
at least worth debating."
the Fed’s job is to reduce inflation, not to drive the economy into the
ground. Some observers insist that conquering inflation requires a
recession. But that’s based on Phillips curve reasoning: High
unemployment is supposedly needed to slow the growth of wages, which in
turn will slow the growth of prices. Maybe. But what if that proves
wrong here—as it has for most of the 21st century?
these amazing facts. When the Fed started tightening in March 2022, the
unemployment rate was 3.6%. Since then, about four million net new jobs
have been created, and the unemployment rate today stands at 3.4%.
Yet inflation has come way down, not up; wage increases are moderating,
not accelerating; and less inflation from rents is in our future. We
also know that the effect of tight money on inflation is long delayed.
Maybe, just maybe, the Fed can finish off the dragon without killing the
months ago, before all the good inflation news started pouring in, I
thought the odds were strongly against achieving a soft landing. Now
they look to be at least 50-50, maybe better. And if a soft landing is
possible, shouldn’t the Fed try for it?"
There was another article in the Feb. 9 WSJ that takes a different position. See Goldilocks Economy Is a Fairy Tale Too Good to Be True by James Mackintosh of The WSJ. Excerpts:
"What investors really liked in the 1990s was a Goldilocks economy—not
too hot, not too cold, just like the porridge she eats in the fairy
tale. To the delight of investors, Goldilocks seems to be back, in spite
of full employment that ought to push up wages fast."
" Last month’s payrolls figures
showed strong job creation, even stripping out the end of some
public-sector strikes. The unemployment rate was last lower in 1953. Inflation is down, with the Fed’s preferred measure running at an annualized three-month rate of 2.9% in December, from 6.7% in June. And wages are rising more slowly,
with private-sector wage costs up an annualized 4.2% in the final
quarter of last year, sharply below a 6.5% increase in the second
quarter and not much above the 3%-4% compatible with the Fed’s inflation
"The bull case is that inflation was, after all, transitory.
The Fed will realize that it doesn’t need to be hawkish and rates will
come down without unemployment needing to rise much, if at all."
"Fed Chairman Jerome Powell . . . he has reiterated that the strong jobs market means rates will have to be higher for longer"
"But Mr. Powell still sees inflation danger in core services, where
prices are particularly sensitive to higher wages. Strip out rent from
services, and prices were up 4.9% on an annualized basis in December"
"overall demand in the economy is running ahead of supply. That means
underlying prices will keep rising too fast, and the Fed won’t risk
cutting rates—unless there is a recession."
"Part of the disagreement between bulls and bears is about how sensitive wages are to unemployment, a relationship known as the Phillips curve—named
after the New Zealand economist who first charted it. After the
financial crisis of the late 2000s, the Phillips curve flattened, so
higher demand for workers did little to push up wages. But as Gerard
Minack of Minack Advisors points out, the curve seems to have shifted,
with wages rising by more for any given level of unemployment than they
did between 2008 and the pandemic. With unemployment so low, wage
pressure should be expected if there has truly been a change in the
"Minneapolis Fed President Neel Kashkari told CNBC on Tuesday, it is hard to imagine that strong jobs growth is compatible with weaker wage growth."
The Fed chairman says the relationship between inflation and unemployment is gone (2019)
Unemployment Isn’t What It Used to Be: The low rate doesn’t take account of low labor-force participation. Wages are a better indication of slack (2019)
The Phillips curve is alive and well (unless it's dead) (2019)
Fed officials disagree on how much inflation the current low unemployment rate might cause (2018)
Jobs and Inflation: The Great Trade-Off, Demystified: The relationship between inflation and unemployment is real, but far from simple
Fed Looks for Goldilocks Path as Jobless Rate Drops
Is the Phillips curve affected by prices that are acyclical? (2019)
What is Full Employment? (2020)