Growing Optimism for a Soft Landing
After a prolonged period of concern, Americans are beginning to feel more positive about the economy and inflation. This trend, reflected in measures of consumer sentiment like the University of Michigan index, could sustain consumer spending, fuel economic growth, and potentially influence the decisions of voters.
There is a growing sense of optimism that the Federal Reserve is on track to achieve a rare “soft landing,” where borrowing rates are maintained at a level that cools growth, hiring, and inflation without triggering an economic downturn.
Despite initial predictions of a recession caused by the Fed’s rate hikes, the economy defied expectations by accelerating last year – expanding by 2.5% compared to 1.9% in 2022. However, some economists anticipate a slight slowdown this year as higher rates begin to dampen borrowing and spending.
Key Questions on Inflation and the Economy
While inflation in the United States has significantly slowed down, overall prices still remain nearly 17% higher than pre-pandemic levels. This persistent reality raises crucial questions for voters, many of whom continue to feel the financial and psychological effects of the highest inflation rates in four decades.
The Federal Reserve began increasing its benchmark rate in response to rising inflation during the economy’s recovery from the pandemic recession. By the time the rate hikes concluded in July last year, the central bank had raised its influential rate from near zero to approximately 5.4%, the highest since 2001.
As the effects of these rate hikes rippled through the economy, year-over-year inflation dropped from 9.1% in June 2022, the highest rate in 40 years, to 3.4% as of the latest data.
Additionally, unemployment has remained below 4% for a record-breaking 23 consecutive months, alleviating pressure on companies to raise wages and pass higher labor costs onto customers through price increases.
Some economists predict that the economy could weaken in the coming months as pandemic savings are depleted, credit card usage approaches its limit, and higher borrowing rates limit spending. However, recent government data shows that consumers increased their spending at retailers in December, which ended the holiday shopping season on a positive note.