Ready for a Soft Landing?

When the U.S. Labor Department's July jobs report revealed that job growth had slowed significantly and the unemployment rate had climbed to the highest level in almost three years, fears of a broader economic slowdown briefly sent Wall Street into crisis mode, sparking a broad sell-off. However, optimism quickly returned when initial jobless claims declined for two weeks straight and this week's CPI report fueled hopes of a nearing end to the inflation crisis.

In fact, the latest jobs reports, which showed a significant cooling of the long-overheated labor market could be described as "Fed-friendly", as Jerome Powell has repeatedly stressed that the labor market needs to come into better balance for inflation to cool and the Fed to able to start cutting rates.

"In the labor market, supply and demand conditions have come into better balance," Powell said at a press conference following the latest FOMC meeting on July 31. "The unemployment rate has moved up but remains low at 4.1 percent. Nominal wage growth has eased over the past year, and the jobs-to-workers gap has narrowed. Overall, a broad set of indicators suggests that conditions in the labor market have returned to about where they stood on the eve of the pandemic - strong, but not overheated."

With inflation cooling to 2.9 percent in July, the labor market coming into better balance and the advance estimate of second quarter GDP showing an acceleration of economic growth, hopes of the coveted soft landing, i.e. a scenario in which the Fed manages to bring down inflation without plunging the economy into recession and a period of high unemployment, are more alive than ever.