The term soft landing refers to a scenario in which inflation is tamed without triggering a recession. The recent performance of major US banks, Federal Reserve policy shifts, and mixed economic indicators offer insights into whether this elusive goal is achievable. While the US economy displays resilience, challenges that could tip the scales in either direction remain.
The recent earnings reports from JPMorgan Chase and Wells Fargo have provided a surprising degree of optimism about the possibility of a soft landing. Despite declining profits — 2% for JPMorgan and 11% for Wells Fargo — both institutions fared better than expected, suggesting underlying strength in the US economy. JPMorgan’s CFO Jeremy Barnum said these results align with the soft-landing narrative, pointing to resilience in both consumer and corporate sectors.
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A glimmer of hope for US economy
Investment banking activities, which saw jumps of 37% and 31% at Wells Fargo and JPMorgan, respectively, also offer an encouraging sign. The rebound in dealmaking, after a prolonged drought, signals confidence in long-term economic stability. Furthermore, net interest income, a key indicator of lending profitability, rose, allowing JPMorgan to revise its full-year earnings forecast upward by $1.5 billion. These improvements suggest that the broader economy, particularly key players like banks, may avoid a sharp downturn.
However, concerns persist. Credit losses have risen substantially, with JPMorgan setting aside $3.1 billion as a provision for loan defaults, particularly among credit card customers. While Barnum argues that these losses reflect a return to normal credit patterns, the stress on lower-income households, as highlighted by Wells Fargo’s CFO Mike Santomassimo, points to vulnerabilities that could yet destabilise the economy.
Fed’s inflation strategy
The Federal Reserve plays a crucial role in determining whether the economy achieves a soft landing. Recent indications are that the central bank is well-positioned to achieve this goal. The Fed’s interest rate cut in September, reducing rates by half a percentage point, was designed to strike a balance between keeping inflation in check and supporting growth in the labour market.
The Fed stresses on the importance of recalibrating monetary policy, acknowledging that inflation is easing while the labour market remains strong. Its caution, particularly in light of potential shocks like rising oil prices, underscores the delicate balance the Fed must maintain. The Fed’s strategy of reducing rates incrementally rather than aggressively, aiming for a neutral interest rate that neither boosts nor dampens demand, reflects a careful approach to avoid triggering a recession.
United States economy: Inflation rate
This policy stance is supported by data, including September’s robust jobs report, which has quelled fears of a near-term recession. With unemployment holding steady and inflation moving closer to the Fed’s 2% target, the prospects of a soft landing appear feasible, though not guaranteed. The key challenge will be managing inflation expectations and responding to any unexpected economic shocks swiftly.
Inflation and employment
Despite the encouraging signals from the banking sector and the Fed’s measured approach, recent data on inflation and unemployment complicate the outlook. According to a report from the Department of Labour, jobless claims surged unexpectedly, and core inflation — excluding volatile food and energy prices — rose to 3.3%, well above the Fed’s 2% target.
These figures suggest that while inflation is trending downward, it remains stubbornly high in certain sectors, particularly housing. Shelter costs, a significant component of inflation, have been slower to stabilise, although there are signs of improvement. With core inflation rising for the first time since March 2023, concerns are growing about whether the Fed’s current trajectory of rate cuts will be enough to curb price pressures without reigniting inflation.
United States economy: Unemployment rate
On the employment front, the increase in jobless claims to 258,000, far exceeding forecasts, signals potential trouble. However, some economists attribute this spike to temporary disruptions, such as Hurricane Helene and labour strikes, rather than a broader deterioration in the labour market. If these factors prove to be short-lived, the underlying strength of the job market could support the Fed’s soft-landing efforts.
As things stand, the US economy appears to be inching toward a soft landing, but it is far from a certainty. The resilience of major banks and the Fed’s careful policy adjustments provide a foundation for optimism. The ability of the banking sector to adapt to rising credit losses and slower consumer spending, particularly among lower-income households, will be crucial.
The Fed’s task is equally challenging. It must continue to balance the need for lower interest rates to sustain economic growth with the ongoing battle to reduce inflation. With global risks, such as rising oil prices and geopolitical tensions, adding to the complexity of the situation, the central bank’s strategy will require flexibility and precision.
While a soft landing remains within reach, it hinges on several factors: the continued strength of the labour market, the successful management of inflation, and the ability of policymakers to respond to unforeseen disruptions. The coming months will be critical in determining whether the US economy can defy historical trends and achieve this delicate feat. For now, cautious optimism prevails, but uncertainties remain.