On prospects for a soft landing…

Princeton Economist Alan Binder has a column in today’s Journal; here are a couple excerpts:

Some­what? In truth, the first and sec­ond halves of 2022 were like two dif­fer­ent worlds in terms of infla­tion. The most stun­ning ex­am­ple is the be­hav­ior of the over­all con­sumer price in­dex. While this mea­sure of inflation isn’t the Fed’s fa­vorite (more on that shortly), it gets vastly more pub­lic at­ten­tion than any other mea­sure. The CPI rose at an 11.1% an­nual rate in the first half of 2022 and a 1.9% an­nual rate in the sec­ond half. No, that is not a typo—a tad un­der 2%.
One pos­si­ble rea­son may be that the Fed’s 2% in­fla­tion target ap­plies not to the CPI but to the de­fla­tor for per­sonal con­sump­tion ex­pen­ditures—a wonk­ish point, but it’s true. How­ever, PCE in­fla­tion also crumbled—from 8% in the first half of 2022 to 2.1% in the sec­ond. That’s “only” a 6-point drop, less than the 9-point drop in CPI in­flation, but still re­mark­able. The FOMC calls that “eas­ing some­what?”

There is more: the rapid decrease in energy prices and other indicators. His point is not that inflation has definitely been vanquished, but that the “unanimous” Fed committee should be showing at least some signs of disagreement within. OK, one more:

Con­sider these amazing facts. When the Fed started tight­en­ing in March 2022, the un­employ­ment rate was 3.6%. Since then, about four mil­lion net new jobs have been cre­ated, and the un­em­ploy­ment rate to­day stands at 3.4%. Yet in­flation has come way down, not up; wage increases are mod­er­at­ing, not ac­cel­er­at­ing; and less in­fla­tion from rents is in ourfu­ture. We also know that the ef­fect of tight money on in­fla­tion is long de­layed. Maybe, just maybe, the Fed can fin­ish off the dragon with­out killing the econ­omy.

My opinion which in this case has some merit, the FED Funds rate is being used to push the corporate planners and banks to focus on more productive profitable outlays of capital.

Longer term this is higher GDP growth in the economy. Greater efficiencies in the US of capital and resources. If the rate does not come down much later that goal is a good part of why.

The other reason is to normalize deposits being used as a pool for lending. The banks need the normalization of a healthier interest rate differential.