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Inbound soft landing, according to the Fed

The US Federal Reserve now thinks it has managed to guide the US economy onto the firm bit of the runway, instead of an overshoot into a recession, as it seemed to suggest in its March forecasts.

The central bank has lifted its GDP forecast for this year from anaemic and near recessionary 0.4% in March, to weak 1% which is not strong but not a recession.

The Fed confident inflation is falling and while jobless numbers are forecast to rise, the new estimate is sharply lower than March’s gloomy projection.

From the Fed’s changed forecasts and the recent data, it’s clear the US economy is doing better than it and most economists had expected at the beginning of the year.

Hirings are still happening at a solid pace, wages growth is slowing and consumers are still spending on travel, dining out and entertainment (the continuing pandemic hangover?) but not so much on food, clothing etc.

And yet this change of heart and belief in a soft landing scenario (the phrase wasn’t mentioned, just the changes to economic forecasts) were overlooked by Wall Street – predictably – as investors fretted about the possibility of two more rate rises this year.

The decision to hold fire on rates was well forecast by the market – after all the Fed had been sending more than enough signals since the last meeting about this possibility and only idiots among economists and analysts forecast another rate rise from this meeting.

The Fed’s rate-setting Federal Open Market Committee explained in its usual post meeting statement that “holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy.”

The decision was unanimous and market focus switched to the so-called “dot plot” – in which the individual Committee members indicate their expectations for future levels of interest rates – indicated the possibility of two more increases this year.

That would see the Federal Funds Rate rising to 5.6% by the end of this year from 5.1% at the moment and some economists wondered why the central bank paused now and didn’t push another rate rise through in July and then sit.

Assuming the Fed moves in quarter-point increments, that would imply two more hikes over the remaining four meetings this year. Bank of America said in a note after the meeting that it expects the Fed to move in July and September.

But during his press conference, Chair Jay Powell said the FOMC hadn’t yet made a decision about whether another increase would be likely in July.

The pause will allow that decision to be mulled over but will also give the central bank time to see if its change of heart about the health of the economy, is backed by incoming data on inflation, jobs, retail sales (and consumer demand generally).

And the pause is also in response to the revelation in the new economic forecasts that the Fed no longer sees the US economy sliding into recession later this year.

The Fed’s median forecast for GDP in 2023 is now a stronger 1% growth compared with the stumbling 0.4% estimate in March.

The Fed sees unemployment now reaching 4.1% by the end of this year (from 3.7% at the moment), the March forecast had it reaching 4.5% (when unemployment was 3.5%).

Those March forecasts suggested the Fed was prepared for the economy to slow to a recession pace to cap inflation and push it lower. It now thinks that has happened.

Headline inflation is now at 4% and producer prices have started falling on a monthly basis. Sometime later this year consumer inflation could fall to around 3% if oil prices continue to slide like they are now doing.

The Fed sees its preferred PCE inflation measure at 3.2% (3.3% in March) and core inflation a little higher at 3.9% (3.6% in March). Core CPI inflation was 5.3% in May, which is still too high.

That high reading for core CPI was due to high rents and used car prices. Those costs are seen easing over the rest of 2023.

That is what the Reserve Bank here and governor Philip Lowe are attempting to do with an Australian economy with a more endemic inflation problem than in the US.

Yesterday’s strong jobs figures for May had all the headless chooks in the markets cackling on about another rate rise in July but the message from the jobs figures is that they should be seen as a warning that the central bank is running out of room for a soft landing and the chances of a crunch are growing.


In contrast to what the Fed now believes, New Zealand’s central bank has missed the soft landing and got the recession it wanted with news the country’s economy contracted slightly in the three months to March.

After the shock slide in growth in the final quarter of last year when GDP contracted 0.7% (previously a fall of 0.6%), Stats NZ said Thursday the March quarter saw a 0.1% fall.

Annual growth slowed to 2.2% in the March quarter from 2.4% in 2022. But the contraction in successive quarters met the technical definition of a recession.

The Reserve Bank of NZ has been forecasting a recession as a result of its intense monetary policy tightening campaign for the past 18 months.

And don’t expect to see any rate cuts in the immediate future from the RBNZ which made it clear yesterday it was sticking with its hawkish monetary policy stance.

Economists say the dramatic impact of Cyclones Hale and Gabrielle dragged on economic activity in the three months to March but the small contraction could very well be the last, given the way construction, finance and telecoms activity improved in the quarter in a broad-based rebound.

Economists think the recovery operation from the Auckland floods and then Gabrielle will support growth in the second and into the third quarters.

The recent NZ government budget included $NZ1.1 billion to fund the recovery from the cyclone. The total cost of the disaster is estimated to be as high as $NZ14.5 billion.

“The December 2022 and March 2023 quarter declines follow growth in the June and September 2022 quarters,” Stats NZ economic and environmental insights manager Jason Attewell said.

Half the sectors tracked by Stats NZ saw declines in economic activity in the first three months of the year, led down by business services including advertising and management consulting.

“The adverse weather events caused by the cyclones contributed to falls in horticulture and transport support services,” said Attewell.

High inflation, included a sharp rise in food prices, helped lift household consumption spending.

After missing the December quarter contraction (it forecast growth of 0.7%), the RBNZ also missed the March quarter dip with a forecast of 0.3% GDP growth for the three months in its May Monetary Policy Statement, and for the economy to contract modestly after.

“Annual GDP growth is projected to be flat at 0.0% in the year to the December 2023 quarter,” the Reserve Bank said at the time.
It might still get that, but not without the embarrassing misses but the repair and rehab work in the North Island will be s solid stimulant for much of this year, as will rising immigration and solid tourism numbers.