The soft landing is the great mantra of central bankers.
When the economy overheats, the goal is to slow it down to contain inflation, but without doing too much damage.
This is what the president of the Federal Reserve, Jerome Powell, is looking for in the United States.
But the path has narrowed more and more.
The priority is to reduce inflation at all costs;
the risk, a recession.
Powell is late.
Inflation is at 8.6%, the maximum in 40 years.
The biggest rise in US interest rates since 1994, from 0.75 points to 1.75%, approved this Wednesday, is a way to make up for lost time.
The members of the Federal Reserve committee that decides interest rates believe that there will be more hikes in the short term, so that the rates are located, according to their projections, at 3.4% this year and 3.8% in 2023, the highest levels since 2008, when the financial crisis that gave rise to the Great Recession began.
There are some signs in the Fed's projections that this will take its toll.
According to his calculations, unemployment will rise from the current 3.6% to 4.1% in two years.
The members of the Fed also point out that the rates will start the downward path in 2024, a sign that the central bank hopes to have room for a less restrictive policy.
His forecasts still point to a soft landing, since 4.1% unemployment is still, as Powell pointed out on Wednesday, a very reasonable level of unemployment.
In his memoirs, the
teacher
Alan Greenspan, president of the Federal Reserve from 1987 to 2006, points out as one of his greatest successes having achieved with the rate hikes of 1994 —the last one of 0.75 points, like the one now —, the long-awaited soft landing.
Greenspan explains that the term was not even used at the Fed at the time, but rather was a term derived from the space race between the United States and the Soviet Union in the 1970s. Powell's spacecraft is at risk of crashing or suffer a forced landing.
Many economists believe that a recession is very likely.
High inflation and the slowdown in the economy, a sort of stagflation, could take a costly toll on Democrats in the legislative elections on November 8.
Joe Biden's party risks losing its narrow majority in both houses of Congress.
Changes to the statement
Analysts who scrutinize the differences between the Federal Reserve's statements have noticed that this phrase had disappeared in this Wednesday's statement that was in May's: "With adequate firmness in the orientation of monetary policy, the committee expects that inflation returns to its 2% target and the labor market remains strong.”
The Fed has deleted the soft landing phrase.
He no longer sees it so clearly, perhaps neither in terms of prices nor in terms of employment.
The explanation, according to Powell himself, is that there are too many factors out of control.
“Really, our goal is to get inflation down to 2% while the labor market remains strong.
What is becoming increasingly clear is that many factors that we do not control are going to play a very important role in deciding whether or not that is possible," Powell said, citing the war in Ukraine, commodity prices, energy and food and bottlenecks in the global supply chain.
"There is a way for us to get there, but it's not getting easy, it's getting more complicated," he added.
With interest rate hikes, the Fed can cool demand, but if supply problems like that continue, there's no guarantee that inflation will come down easily.
Faced with a choice between controlling inflation and keeping the labor market strong, Powell is clear.
The first thing now is to move towards price stability.
And there comes the second great novelty of the statement: "The committee is firmly committed to returning inflation to its 2% target," is the most prominent new phrase.
Powell has adopted with inflation the
whatever it takes
tone that an analyst asked of him, in reference to Draghi's phrase (everything necessary, whatever it takes) pronounced by the then president of the European Central Bank (ECB), Mario Draghi, to save the euro.
"We don't want to induce a recession right now, I want that to be clear," she said, but that doesn't mean she isn't willing to provoke one if necessary to control prices, and even less so "right now."
“We do not seek to put people out of work. We never think that there are too many people working and that there needs to be fewer people with jobs, but we also think that you cannot have the type of labor market that we have without price stability.
It will not happen with the levels of inflation we have, ”he added, after recalling that there are twice as many job vacancies as there are unemployed.
With Powell as chairman, the Federal Reserve launched what it called inclusive monetary policy.
It was willing to keep interest rates very low so that more employment could be created and even marginal and less qualified sectors would have opportunities.
The premise for that, a controlled inflation, is what has been blown up.
In its projections, the Fed still calculates that the unemployment rate will only rise to 4.1% in 2024, from the current 3.6%, "historically low", as its president said.
It is still an optimistic forecast.
Regarding the evolution of the economy, the Federal Reserve has drastically lowered its forecasts.
Faced with a growth scenario of 2.8% for this year and the 2.2% for the next one that was anticipated in March, it has gone to 1.7% in each of the two years, always with data referring to the fourth quarter The exercise.
More rate hikes
Powell explained that if the rise in rates this Wednesday was 0.75 points, and not 0.50, as he had suggested in the previous meeting, it was because prices have once again surprised on the rise and also because expectations of future inflation have skyrocketed.
All this has happened in the days before the meeting, the period in which the members of the Federal Reserve are obliged to remain silent and not make statements on interest rates, so that they have not been able to anticipate the message to the market.
Even so, after the publication of that data, investors had already made up their minds about the rise.
Stock markets fell, the dollar appreciated and interest rates on debt skyrocketed.
This Wednesday, the tone has not seemed particularly harsh and the markets have partially corrected these movements.
The chairman of the Federal Reserve indicated that he is aware that 0.75 points is a strong one-time increase and that it would not be the norm.
But he also said a further rise of 0.5 or 0.75 points is "very likely" for the July meeting.
The central bank is accelerating rate hikes to make up for lost time, aware that it has reacted somewhat late.
And right now he cares less about going too far with rate hikes than falling short: “We are well aware of the dangers, but I will say that the worst mistake we could make would be to fail [in the fight against inflation], which is not One option.
We have to restore price stability because it is the basis of the economy, without price stability, the economy will not work.
So we want to get the job done,” he explained on Wednesday.
Arthur Burns, chairman of the Federal Reserve in the 1970s, was tolerant of inflation and it was entrenched in the US economy for a decade.
He has gone down in history as one of the causes of the Great Inflation.
It was the legendary Paul Volcker, in the following decade, who led the Great Disinflation with aggressive rate hikes.
Powell was asked about the latter at the May press conference: “Who isn't a fan of Paul Volcker?
He should not be singled out in this regard.
But I got to know him a little bit and I have tremendous admiration for him.
He had the courage to do what he believed was the right thing to do,” he replied.
Powell believes that the right thing to do now is to lower inflation, even if it costs a recession.
Subscribe here to the EL PAÍS América newsletter and receive all the key information on current affairs in the region.
50% off
Exclusive content for subscribers
read without limits
subscribe
I'm already a subscriber