Monetary Precision: Chartering the US Economy's Path to Stability

Looking to the present, the US economy is on a trajectory towards a soft landing, propelled by astute monetary policy measures implemented by the Fed.

Source: Reuters

In February 2024, the inflation rate stood at 3.15%, a significant drop from its peak of 9.06% in June 2022. This achievement reflects the Fed’s successful efforts in controlling inflation and maintaining stability within a span of just one year. Moreover, with unemployment stabilising at a below-average rate of 3.7% in January, coupled with steady and low inflation, the economy has shown unexpected resilience. Despite low inflationary pressures, GDP expanded at an annualised rate of 4.9% in Q3 and 3.4% in Q4, supported by strong increases in consumer spending.

The Fed’s monetary policy measures have played a pivotal role in this success story. Beginning with modest short-term interest rate increases from 0-0.025%, the Fed gradually raised rates to a substantial 5.25-5.50% by late 2023. These strategic targets set by the Federal Open Market Committee (FOMC) have had the effect of cooling aggregate demand and anchoring long-term inflation expectations, supporting the decline in inflation. 

Comparisons to the soft landing of the 1990s reveal subtle differences. While the mid-1990s economy boasted strong household balance sheets, it grappled with higher unemployment rates compared to the current scenario. This disparity can be attributed to differences in labour market dynamics, with the current labour market exhibiting tighter conditions.

The Fed’s proactive approach in managing inflationary pressures while supporting economic growth has positioned the economy for stability and continued expansion. However, it remains to be seen whether the landing can be stuck and challenges abound. 

Samar Gill - 2024