It’s all about the soft landing now. Ergo, will he or won’t he engineer one?
Fed Chairman Ben Bernanke is now engaged in what may prove to be the defining act, for good or ill, of his central-banking career. Having bet more than a little of his reputation (nascent though it is as the Fed’s leader) on the arrival of a soft landing, the world will be monitoring the associated economic data as it rolls in for confirmation or denial. The smallest deviation from the expectations that Ben has fomented could deliver more than a little volatility in stock and bond markets, which have recently become accustomed to believing that the Fed can deliver on its promises.
But the challenges on the road to economic perdition (or salvation) are many. For starters, recent converts to the faith in bull markets might ask themselves what exactly constitutes a soft landing? In general terms, the answer is obvious: an economic slowdown that avoids recession. But even a downshift in GDP’s pace that manages to stay north of zero isn’t problem free.
Consider that the U.S. economy advanced at an annual rate of 2.5% in this year’s second quarter. That’s sharply slower than the 5.6% logged in the first quarter. One might argue that the change represents a soft landing. But the concept of supple economic set downs must be housed in proper context with inflation. The main reason the Fed seeks a soft landing is because it wants a lesser inflation.
A noble ideal, and one that’s notoriously tricky to deliver. Although the pace of GDP has slowed considerably, inflation has yet to show a commensurate pullback. Yes, the core rate of consumer prices in July decelerated from its trend in March through June. But it’s not yet clear if the drop to 0.2% for core CPI last month from 0.3% for each of the previous four months is sustainable, or just a temporary pause.