This time last year, the consensus among professional economic forecasters expected a recession. Some experts like former Treasury Secretary Larry Summers said we “needed” higher unemployment to get inflation down. A soft landing — avoiding a recession and getting inflation down — was seen as impossible. Those experts were wrong. The soft landing is in sight. Inflation fell from a 9% annual rate in the summer of 2022 to 3%, unemployment has had its longest run under 4% since the 1960s, and consumer spending, inflation-adjusted, rose at a fast clip.
What 2023 showed was that the ‘impossible’ was not only possible — which I have always argued — but is reality. We are not at the soft landing yet, but we are getting close.
Federal Reserve Chair Jay Powell is not flying the plane, despite the popular narrative.
But it’s important to understand how the economy got on course for this soft landing. Federal Reserve Chair Jay Powell is not flying the plane, despite the popular narrative. He’s sitting in first class but giving the Fed credit means we could learn the wrong lessons — in particular, leaving interest rates too high for too long.
To his credit, Powell never said we needed a recession to get inflation down. That was crucial because the Fed knows how to cause one, as his predecessor Paul Volcker did in the early 1980s. But the Fed has been largely irrelevant on inflation this time. It fights inflation by raising interest rates, which reduces demand but does not increase supply. The recent main drivers of inflation, however, were supply-driven disruptions from the pandemic and later the war in Ukraine: supply chains freezing up, millions of workers dropping out of the labor force, a rapid shift to spending on goods from services, and energy shortages.
Powell did not unload the docks in Los Angeles, take a second job, give vaccine shots or drill for oil. These people are the ones who brought inflation down in 2023. They are the ones flying the…
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