The Fed's own economists now expect a Goldilocks scenario: No recession, low inflation, and positive growth

• Economists from the Federal Reserve Bank of Chicago predict inflation will cool without a recession.
• In a September report, they broke down a Goldilocks outlook for a soft-landing scenario.

The US economy may just skirt a recession after all and most of the effects of rate hikes have already taken shape, according to Stefania D'Amico and Thomas King, economists at the Federal Reserve Bank of Chicago.

In a new September report, they argued that the 11 rate hikes since March of 2022 have put the economy on track for a Goldilocks scenario of a soft landing, and there may no longer be a need for further monetary policy tightening.

D'Amico and King pointed to their vector autoregression model as reason to believe the Fed could hit its 2% inflation target by next year. The 500 basis points of rate increases since last March have curtailed output, and prices are on a downward cooling track.

"That model implies larger effects of monetary policy and faster policy transmission than other empirical models," the economists said. "We estimate that although the majority of the effects on output and inflation have already occurred, the policy tightening that has already been implemented will exert further restraint in the quarters ahead, amounting to downward pressure of about 3 percentage points on the level of real gross domestic product (GDP) and 2.5 percentage points on the Consumer Price Index (CPI) level."

The model's estimates put CPI at 2.3% by the middle of 2024, and that's in line with the Fed's 2% target when using the personal consumption expenditure price index, the economists said.

So far, based on the analysis, tighter policy has resulted in 5.4 percentage points in the level of real GDP and 7.1 percentage points in CPI. That represents about 65% and 75% of the total tightening effects on the levels of real GDP and CPI, respectively, that will occur, according to the model.

It will take more time for those impacts to manifest in the labor market, which has proved resilient through the tightening campaign, but that doesn't mean that more hiking will be needed. Policy has reduced total hours worked by about 4 percentage points, or about 40% of the total effect that is ultimately projected.

"Importantly," the economists added, "the remaining 35%, 25%, and 60% of the total impact on the levels of real GDP, CPI, and hours worked, respectively, imply that past monetary policy tightening will exert further downward pressure of about 3 percentage points on real GDP over the next five quarters, 2.5 percentage points on the CPI over the next four quarters, and 6 percentage points on hours worked over the next eight quarters."