The Fed Has Significantly Improved the Odds of a Soft Landing

The Fed Has Significantly Improved the Odds of a Soft Landing By Hardika Singh

In the past month, something that once seemed impossible suddenly became likely. After four years of upheaval, the U.S. now seems to have low inflation, low unemployment, and solid economic growth, writes Greg Ip for The Wall Street Journal.

The popular term for this is soft landing. A better word is "normal." This is what an economy is supposed to look like.

Until Wednesday, one thing still looked abnormal: the Federal Reserve's interest-rate target, which at 5.25% to 5.5%, was much higher than economic conditions called for.

The Fed has begun to rectify that abnormality with its half-point rate cut. This vastly improves the odds of a soft landing. It might even leave the economy and interest rates looking more normal a year from now than before the pandemic.

To be clear, "normal" doesn't mean idyllic. Some people will be unemployed. Some people's wages will not keep up with inflation. Prices will rise gradually but won't go back to where they were before the pandemic. Normal simply means sustainable, without the excesses that lead to either recession or accelerating inflation.

Read more .

Top News Big Rate Cut Forces Fed to Contend With New Obstacles

Fed Chair Jerome Powell entered a new phase in his campaign to softly land the U.S. economy, lowering interest rates Wednesday with an audacious half-point cut. The move raised new questions the central bank can't easily answer, writes The Wall Street Journal's Nick Timiraos.

At the same time, the rate cut did clarify the answer to a more important question about the Fed's overarching goal. It underscored Powell's desire to prevent the central bank's past rate rises from tipping the economy into recession now that inflation is heading down.

But chief among the questions the Fed can't easily answer now that it is cutting: Where is the Fed taking rates and how fast will it get there?

The Fed doesn't know on either front. Officials often set policy with an eye toward figuring out where their interest rate is relative to a so-called neutral rate that neither spurs nor slows growth. The neutral rate can't be observed. Before the pandemic, most Fed officials thought this neutral rate had fallen to 2.5% or lower. Now, many think the rate has risen. Possible contributors include soaring government deficits and new sources of demand for investment.

Powell characterized the Fed's latest cut, which lowered the benchmark federal-funds rate to between 4.75% and 5%, as "recalibrating policy down over time to a more neutral level." While he has typically avoided offering specific pronouncements about where that might be, he volunteered on Wednesday that "the neutral rate is probably significantly higher than it was" before the pandemic.

"How high is it? I just don't think we know," Powell said. Read more .

Fed Cuts Rates by Half Percentage Point Fed Officials Forecast Higher Unemployment, Lower Inflation Than Three Months Ago One Fed Official Dissents on Fed Rate-Cut See What Changed in the Fed's Latest Statement Transcript: Fed Chief Jerome Powell's Postmeeting Press Conference Bank of England Holds Off On Rate Cut After Fed Decides To Go Big

The Bank of England left its key interest rate unchanged Thursday , taking a more cautious approach than the Federal Reserve in loosening the restraints it imposed on the economy to tame inflation.

Brazil's Central Bank Resumes Hiking as Inflation Remains High

Brazil's central bank raised interest rates for the first time in two years , just hours after the Federal Reserve joined a global cutting wave, as the victory over inflation that feels in reach in many parts of the world is looking uncertain in Latin America's largest economy.

U.S. Economy Does the Big Fed Cut Make Refinancing Worth It?

Those who bought homes in the past few years have a call to make after the Federal Reserve's hefty rate cut: Look to refinance their mortgages now, or wait for a better deal in a future cut. The decline in interest rates is offering many homeowners a chance to swap their current mortgage for one with a lower rate . Refi applications have more than doubled over the last seven weeks as mortgage rates fell, according to Fannie Mae.

U.S. Importers Pull in Goods Early as Possible Port Strike Draws Near

U.S. importers are rushing in millions of dollars' worth of electronics , holiday goods and industrial materials to get ahead of a possible strike by dockworkers in less than two weeks that threatens to lock down major ports and hammer the American economy.

Tech Jobs Have Dried Up-and Aren't Coming Back Soon

Postings for software development jobs are down more than 30% since February 2020 , according to Indeed.com. Industry layoffs have continued this year with tech companies shedding around 137,000 jobs since January, according to Layoffs.fyi.

Republican Divisions Sink House Bill as Government Shutdown Nears

An initial proposal by House Speaker Mike Johnson (R., La.) to fund the government was voted down Wednesday , underscoring the divisions within the Republican Party but potentially setting the stage for talks with Democrats on avoiding a partial shutdown at the end of the month.

Financial Regulation Get Ready to See Stock Prices in Half-Pennies

Stock prices in half-cents are coming soon to a brokerage near you. The Securities and Exchange Commission on Wednesday approved a change to market rules that would cause the prices of many stocks to be quoted in increments of $0.005.

That Time Trump Walked Into a Bar and Bought a Round Using Bitcoin

"History in the making," Donald Trump declared Wednesday after making the transaction at PubKey, a Greenwich Village tavern that is the it spot for crypto enthusiasts-a rising financial and political force that Trump is hoping will help him return to the White House. He has promised a more favorable regulatory climate if he wins a second term.

Forward Guidance Thursday (all times ET)

8:30 a.m.: Philadelphia Fed Business Outlook Survey

8:30 a.m.: Initial jobless claims

10 a.m.: Existing home sales

10 a.m.: U.S. leading economic indicators

7 p.m.: U.S. President Joe Biden delivers remarks at the Economic Club of Washington, DC

Friday

5 a.m.: Japan monetary policy meeting decision

11 a.m.: European Central Bank President Christine Lagarde and IMF Managing Director Kristalina Georgieva speak at the Michel Camdessus Central Banking Lecture

2 p.m.: FRB Philadelphia President Patrick Harker speaks at Tulane University Freeman School of Business Lecture event

Research Fed Rate Cut to Help Emerging-Market Central Banks Carry On Easing

Global financing conditions will continue to ease over the next few months, helping emerging-market central banks to carry on with easing, says Carlos de Sousa, EM debt portfolio manager at Vontobel after the Federal Reserve's 50-basis-point rate cut. "This will open up space for several emerging-market central banks to resume or continue the easing cycles they had already started ahead of the Fed," he says. Lower risk-free rates in the developed world will also reduce external borrowing costs for emerging-market issuers, hence lowering refinancing risks and improving debt sustainability, he says. The easing cycle will provide incentives for asset allocators to increase risk into emerging markets as the attractiveness of money market instruments and core developed market rates will gradually decline. - Emese Bartha

Basis Points Construction of new homes rose 9.6% in August as builders ramped up new projects. Housing starts rose to a 1.36 million annual pace from 1.24 million in July, the government said Wednesday. Senior Bank of Canada officials agreed to monitor economic data to determine whether to slow or accelerate the pace of interest rate reductions, according to a summary of their deliberations leading up to a quarter-point rate cut this month. Norway's central bank held its key policy rate at 4.5% , a level that is expected to remain unchanged until the end of the year as a weak krone continues to threaten efforts to bring inflation down. Consumers in core markets of Germany, France, Italy and Spain drove an 18% on-year drop in the bloc's monthly registrations, which reflect sales, the European Automobile Manufacturers' Association said. Taiwan's central bank held interest rates steady with a watchful eye on inflation, declining to join the U.S. Federal Reserve and a growing number of its Asian counterparts in starting to ease monetary policy. Asian currencies weakened Thursday amid prospects that the Federal Reserve may not be in a hurry to lower interest rates going forward after its half-percentage-point cut on Wednesday. Australia's unemployment rate was steady in August despite economic growth flatlining over recent months, with employment growing solidly and job market participation remaining at record levels. New Zealand's economy contracted by less than expected in the second quarter, but output was nevertheless weak with the central bank expected to continue cutting rates aggressively over coming months. About Us

WSJ Pro Central Banking brings you central banking news, analysis and insights from WSJ's global team of reporters and editors. This newsletter was compiled by markets reporter Hardika Singh in New York. Send your tips, suggestions and feedback to [hardika.singh@wsj.com].

This article is a text version of a Wall Street Journal newsletter published earlier today.

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September 19, 2024 07:19 ET (11:19 GMT)

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