Fed governor says soft landing possible but not assured

ISTANBUL

US Federal Reserve Governor Lisa D. Cook said on Thursday that a soft landing is possible for the American economy, but it is not assured.

"I believe that a soft landing is possible, with continued disinflation and a strong labor market, but it is not assured," she told at the 2023 Asia Economic Policy Conference held in San Francisco, California.

A soft landing is a situation where a central bank raises interest rates too much and too high, leading to an economic slowdown but avoiding a recession.

While many economists have believed that the Fed's unprecedented monetary tightening could push the US into a recession, the American economy expanded 4.9% in the third quarter, strongly beating market estimates of 4.3%, according to the Commerce Department's first and advanced reading.

As economies around the world gradually reopened from the coronavirus pandemic, demand surged, especially for goods, but supply chains were slower to recover, leading to a global surge in inflation, according to Cook.

"With inflation unacceptably high, monetary policy turned toward tightening. Central banks in several emerging market economies began to tighten first, seeking to prevent a de-anchoring of inflation expectations that could cause elevated inflation to become entrenched," she added.

The Fed raised rates by 525 basis points from March 2022 to July 2023 in 11 meetings to fight record inflation that climbed last summer to its highest in more than 40 years. The bank skipped an interest rate increase for the third time on Nov. 1, keeping the federal funds rate between the 5.25% - 5.5% target range -- the highest in 22 years.

"Core inflation has declined from a peak of 5.6 percent in February 2022 to 3.7 percent in September," said Cook. "I believe the Federal Reserve's actions contributed to this fall in inflation both by restraining aggregate demand and by keeping longer-term inflation expectations well anchored."

"Importantly, global supply chains have largely recovered from their disruptions, with a return to pre-pandemic levels of indicators such as the share of manufacturing inputs in short supply," she added.