Last year’s spike in inflation, to the highest level in four decades, was painful for American households, and the cure — much higher interest rates to cool spending and hiring — was expected to bring even more pain; so far though, to widespread relief, the reality has been different, the Associated Press reports. As interest rates have surged, inflation has tumbled from its peak of 9.1% in June 2022 to 3.7%, and the unemployment rate, at a still-low 3.8%, has scarcely budged since March 2022, when the Fed began imposing a series of 11 rate hikes at the fastest pace in decades.
If such trends continue, the central bank may achieve a rare and difficult “soft landing” — the taming of inflation without triggering a deep recession. Such an outcome would be far different from the last time inflation spiked in the 1970s and early 1980s. The Fed chair at the time, Paul Volcker, attacked inflation by escalating the central bank’s key short-term rate above 19%. The result? Unemployment shot to 10.8%, which at the time marked its highest level since World War II.
A year ago, in a high-profile speech, Chair Jerome Powell warned that the Fed was prepared to be similarly aggressive, saying its rate hikes would cause “some pain” in the form of higher unemployment. The Fed, Powell said pointedly, would “keep at it,” a play on the title of Volcker’s autobiography, “Keeping At It.”
Over time, as the job market has displayed surprising resilience, Powell has adopted a more benign tone. At a news conference last week, he suggested that a soft landing remains a “possible,” if not guaranteed, outcome.
How have the Fed’s rate hikes managed to help substantially slow inflation without also causing dire consequences? Can the job market and the economy maintain durability even with the Fed intending to keep borrowing rates at a peak well into 2024?
There are many reasons for the economy’s unexpected resilience. Replenished supplies have helped cool inflation after pandemic-era supply disruptions accelerated it; the job market has changed as immigration rebounds, more prime working age adults have or are seeking jobs, and businesses seek fewer new workers but are not quickly cutting those they have; and consumers and businesses have kept going, with continued spending and factors that have insulated companies against rate hikes more than in the past.
