The Fed itself is the biggest risk to a soft landing for the US economy, top economist says
- The Fed is the biggest risk to a soft landing for the economy, former Fed official Claudia Sahm said.
- An unnecessary recession caused by elevated rates is worse than worrying about cutting rates and having to hike them again.
Central bank officials are trying to gently steer the economy away from a downturn, staying extra cautious about the path of interest rates — but the Fed itself might end up being the reason the US can't stick a soft landing.
"While there is a logic to the Fed's approach, delaying could cost us millions of jobs and trillions of dollars in spending and investment," former Fed economist Claudia Sahm said in a recent post. "Plus, the high interest rates are putting stress on credit markets. The Fed is the biggest risk to the soft landing."
Last week, Fed Governor Chris Waller, said that cutting rates prematurely only to U-turn and hike them back up would be the "worst thing," and Atlanta Fed President Raphael Bostic echoed those concerns, saying a rate reversal would be the "worst outcome."
But Sahm disagrees. Instead, an "unnecessary" recession created by elevated interest rates would be far worse.
"The idea that the worst thing that the Fed can do is cut and then raise is dangerous," she wrote.
Inflation has cooled a lot since its peak of around 9% in the summer of 2022, but current inflation readings are still coming in hotter than expected. CPI data released this month showed inflation accelerated to 3.4% year-over-year in December, higher than forecasts of 3.2%.
That, combined with a slew of other economic data and hawkish Fedspeak, has led markets to rapidly unwind their bets on a March rate cut.
For the Fed to reverse its rate cuts wouldn't be the worst thing in the world, Sahm said.
Paul Volcker, Alan Greenspan, and even current Fed chair Jerome Powell are all officials who pivoted on the pivot.
"One could view these as mistakes, but all three Chairs remained widely respected central bankers," she wrote. "It'd be nice if the world rolled out according to plan. It'd be nice if policymakers had a crystal ball. But that's not how this works."