Fed’s Powell Says Hard Landing ‘Not a Likely Scenario’

Federal Reserve Board Chairman Jerome Powell speaks during an interview with David Rubenstein in Washington, on Feb. 7, 2023. (Julia Nikhinson/Getty Images)

The U.S. economy is unlikely to endure a hard landing as inflation softens and growth remains solid, Federal Reserve Chair Jerome Powell said in a question-and-answer session at the Economic Club of Washington on July 15.

“I wouldn’t rule it out, but I would say that the kind of hard landing scenario is not the most likely or a likely scenario,” Mr. Powell said.

“We'd be happy to have more upside surprises for the economy.”

A hard landing is an economic term to describe an economic downturn following a period of expansion.

During his conversation with David Rubenstein, co-chair of investment fund The Carlyle Group, Mr. Powell said he believed that there was a path to lower inflation without inflicting pain on the labor market.

For now, the head of the U.S. central bank said policymakers must balance two competing interests. Cutting interest rates prematurely could resuscitate inflationary pressures while leaving policy restrictive for too long could undermine economic activity and growth prospects.

While he considers policy to be restrictive, it is “not severely so,” noting that the neutral rate has “probably risen.”

The neutral rate, also known as the natural rate of interest, is the real rate that keeps the economy at full employment while ensuring that inflation is constant.

Still, delaying actions to loosen policy suggests that “you might have waited too long,” Mr. Powell said, echoing the sentiment of eminent economist Milton Friedman.

This was Mr. Powell’s first appearance since the latest inflation gauges.

Last week, the annual inflation rate slowed to 3 percent, down from 3.3 percent. The monthly Consumer Price Index fell for the first time since the beginning of the public health crisis in 2020, sliding 0.1 percent.

The Producer Price Index, a measurement of prices paid for goods and services by businesses and a potential precursor to future inflation developments, rose slightly hotter than expected at a pace of 0.2 percent.

Powell on Capitol Hill

The Fed chief appeared on Capitol Hill last week to deliver his semiannual monetary policy to the House Financial Services Committee and the Senate Banking Committee.

Mr. Powell warned that keeping interest rates too high for too long “could unduly weaken economic activity and employment,” noting that above-trend inflation “is not the only risk we face.”

While the monetary authorities are searching for more good data to “strengthen our confidence that inflation is moving sustainably toward 2 percent,” Mr. Powell told lawmakers that the Fed does not need to wait for inflation to reach that target.

According to the CME FedWatch Tool, the futures market is expecting the first quarter-point rate cut at the policy-making meeting of the Federal Open Market in September.

The benchmark federal funds rate currently stands at a range of between 5.25 percent and 5.5 percent, the highest level in 23 years.

The June updated Summary of Economic Projections suggests that officials anticipate just one rate reduction this year, lowering the median policy rate to 5.1 percent. Policymakers had expected three rate cuts.

What Fed Officials Are Saying

Appearing before the Little Rock Regional Chamber in Arkansas on July 11, Alberto Musalem, president of the Federal Reserve Bank of St. Louis, said that recent inflation data “[point] to encouraging further progress towards lowering inflation.”

“I will be looking for more evidence that inflation can be expected to converge to 2 percent going forward,” Mr. Musalem said, noting that the recent numbers are ”consistent with reports that consumers are becoming more price sensitive and that firms are responding with price cuts and discounts.”

Fed Gov. Lisa Cook said the policy-rate path will depend on the data.

“Even among those cutting rates, however, the future path of the policy rate is generally seen as dependent on a continuing decline of inflation toward target levels,” Ms. Cook said at the Australian Conference of Economists 2024 event on July 10.

Ms. Cook noted that U.S. economic trends signal a “soft landing.”

“Inflation has fallen significantly from its peak, and the labor market has gradually cooled but remains strong,” she said. “Of course, I am closely monitoring incoming data to see how the economy further develops.”

At a roundtable discussion with reporters on July 11, San Francisco Fed President Mary Daly said fresh economic data support the case for cutting interest rates.

“With the information we have received today, which includes data on employment, inflation, [gross domestic product] growth, and the outlook for the economy, I see it as likely that some policy adjustments will be warranted,” Ms. Daly stated.

The U.S. economy grew by 1.4 percent in the first quarter.

According to the Atlanta Fed’s GDPNow model, the growth rate is projected to be 2 percent in the second quarter.

On the labor front, the unemployment rate rose to 4.1 percent in June.

Investors will be paying close attention to the June retail sales report. The consensus estimate suggests a flat reading. The figures will be published on July 16.