US economic soft landing hinges on Fed’s tolerance of inflation

livemint.com:

Fed Chairman Jerome Powell and his colleagues look locked in to raising interest rates by a quarter percentage point this week. The aim: To slow the economy enough to reduce inflation to its 2% target over time, without crashing the US into a recession — a proverbial soft landing. The big question facing policymakers and financial markets is what comes next.

Former Fed Chair Ben Bernanke said that this week’s rate increase may be the central bank’s last in a credit-tightening campaign that’s already seen rates rise by five percentage points. But a lot will depend on how much inflation the Fed is willing to accept, and for how long.   In the absence of a recession, the jobs market looks set to remain tight, with demand for workers continuing to outstrip supply.

That will keep wages elevated, pressuring companies to raise prices to cover their added labor costs. “It’s going to be hard to get enough demand compression without a recession to get that price pressure out of the system," said JPMorgan Chase & Co. chief economist Bruce Kasman.

“I don’t think inflation is going to slide below 3% on a sustained basis" otherwise. As a result, the risk is that the Fed will eventually have to raise rates further after this week’s increase, especially if the US doesn’t slip into recession later this year, Kasman said, though JPMorgan’s official call is that the July boost will be the central bank’s last.   “There’s really no evidence that the Fed has done to enough on stay on the sideline," said Stifel Financial Corp.