Yahoo Finance The Fed has to pass ‘3 checkpoints’ to achieve soft landing: Strategist
The upcoming Federal Open Market Committee (FOMC) meeting is expected to yield another interest rate hike as the Federal Reserve continues its attempts to bring down inflation.
Initially, Fed Chair Jerome Powell stated that his goal was for the U.S. economy to reach a soft landing. That has become harder to attain, however, due to persistent rises in inflation.
According to Gurpreet Gill, macro strategist of global fixed income at Goldman Sachs Asset Management, there are three steps the U.S. has to embark upon in order to achieve a soft landing.
"Broadly speaking, there are three checkpoints on that narrow path to a soft landing that the U.S. is currently on," Gill told Yahoo Finance Live (video above). "The first is sustained declines in GDP growth. We have seen progress there."
According to the Bureau of Economic Analysis, real U.S. GDP decreased by 1.6% in the first quarter of 2022 and by 0.6% in the second quarter.
The second checkpoint, Gill said, is rebalancing the labor market, where progress has been "slower."
"The August labor market report earlier this month did encouragingly show an uptick in labor supply through an increase in labor force participation," Gill said. "Job openings and job growth have slowed. But big picture, the labor market is still remarkably tight, and there are 5.2 million more jobs than available workers. And that jobs-workers gap, we estimate, needs to decline to around 2 million in order for wage growth to fall from 4% to around 3.5% and be consistent with 2% inflation."
Last month's jobs report showed labor force participation ticking up to 62.4% month over month to its highest level since March 2020 as 315,000 jobs were added.
Wells Fargo economists Sarah House and Michael Pugliese described the August jobs report as "just what what the inflation doctor ordered" but cautioned against celebrating too soon.
"While the August jobs report keeps hope alive that the Fed may be able to pull off the elusive soft-landing, there remains significant work ahead in quelling the inflation pressures coming from the labor market," they stated.
The final checkpoint, and arguably the most critical, is a large decline in inflation, another area where progress has been slower than desired. Inflation rose higher than expected last month, with the Consumer Price Index (CPI) showing an 8.3% year-over-year increase and 0.1% month-over-month increase.
"Overall, given this limited progress, we've seen Fed officials dial up their hawkish rhetoric," Gill said. "And that's also why we have dialed up our expectations for Fed tightening this year. ... We do think that risks are skewed towards that hiking cycle continuing into early 2023. And for now, it does appear like continued hikes are more likely than a shift to a policy pivot."
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Ethan is a writer for Yahoo Finance.
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