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Odds of the Fed reducing inflation without a recession have improved, but...

On the eve of recessions in 1990, 2001 and 2007, many Wall Street economists  economists proclaimed the U.S. was on the cusp of achieving a soft landing, in which interest-rate increases corralled inflation without causing a recession. 

Since World War II, economists say, the U.S. has achieved only one durable soft landing, in 1995. “We steered the economy very expertly, but in addition, we were lucky. Nothing bad happened,” said Alan Blinder, an economist who was Fed vice chair from 1994-96.

Here is what could go wrong this time.

First, if the Fed holds rates too high for too long, it would risk an unnecessarily severe downturn. 

The economy stays too hot

Energy prices take off

A financial-market mishap. The Fed held interest rates near zero for seven years after the 2008-09 financial crisis and lifted them to still-historically-low levels in the years before the pandemic brought rates back to zero. As a result, some financial firms and businesses might have made investments or plans that counted on rates staying much lower for longer.

JPMorgan Chase Chief Executive Jamie Dimon  warned of risks posed by large, widening U.S. budget deficits that have to be financed by investors at the same time the Fed is shrinking its $8.1 trillion asset portfolio of government securities. 

Nick Timiraos WSJ 18 September 2023


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