Soft Landing Completed?

With U.S. GDP growing 2.8 percent in the third quarter, unemployment still remarkably low at around 4 percent and inflation falling towards the Fed’s 2-percent target in recent months, the U.S. economy is doing quite well on paper. In fact, it looks like the long-coveted “soft landing”, i.e. taming inflation without a drastic increase in unemployment or a full-blown recession, is almost completed. And yet, frustration with the economy, and high prices in particular, is one of the reasons why Donald Trump and Republicans won the election so emphatically.

Speaking about the disconnect between the actual state of the economy and people’s perception of it, Fed chairman Jerome Powell recently acknowledged the hardship many Americans are going through, saying that they have every right to feel the way they feel. “We say that the economy is performing well, and it is, but we also know that people are still feeling the effects of high prices, for example. And you know, we don't tell people how to feel about the economy, we respect what they're feeling. Those feelings are true, they're accurate.” After all, he argues, inflation has come done but prices haven’t.

So what will it take to make people feel better about the economy? According to Powell, mostly time. Not only for people to get used to the new price level, but for wages to catch up and take the sting out of higher prices. “So what that takes is it takes some years of real wage gains for people to feel better. And that's what we're trying to create. And I think we're well on the road to creating that.”