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Recent economic data suggest that the Federal Reserve’s recent run of interest rate hikes have helped to cool the pace of price gains in the world’s largest economy back down closer to its 2% target. Labor demand has remained broadly resilient, while the unemployment rate has held at relatively low levels.
In a research note on Tuesday, the analysts pointed to a “meaningful moderation” in wage and price growth, adding that the jobless rate has remained “surprisingly low.” They said the economy seems to be on a trajectory that “feels broadly in line” with a so-called “soft landing,” in which the Fed manages to corral inflation without sparking a wider economic meltdown.
However, the analysts argued that in five similar episodes since 1965, unwinding high inflation and strong labor markets has required a marked jump in the unemployment rate. All of these events have been “associated with recessions,” they said, flagging that “advancing the case for a soft landing requires a convincing narrative as to why ‘this time is different.'”
“Our view is that the laws of ‘economic gravity’ seen in previous cycles will ultimately reassert themselves,” the Citi analysts said.
Economic numbers due out this week are expected to provide fresh insight into the evolution of U.S. inflation, and may influence whether the Fed will continue to raise borrowing costs later on this year.
