Will Interest Rates Be High Forever?

The Fed and the Hope of a Soft Landing

When the Federal Reserve pushed interest rates up in its fight against inflation during the post-pandemic period, central bankers often spoke about their goal of a “soft landing” for the economy. Success would look like this: Policy would cool the economy enough to bring inflation under control without triggering a recession.

And to the credit of the Fed, inflation has come down and the U.S. economy has not entered a recession. But does this mean the soft landing is complete?

Surprisingly Hot Data 

It’s complicated. Here’s why: If the high interest rates had cooled the economy as intended, there would be good reason for the Fed to lower rates again. And yes, at the start of the summer, the U.S. labor market started showing some cracks, raising expectations that the Fed would act soon. This happened in September, when the Fed delivered a half-percentage point rate cut (more than their usual quarter-percentage point cut). But since then, things have gotten… murky.

The U.S. economy is strong — almost too strong. In September, consumer price inflation dropped to 2.4%, according to the Bureau of Labor Statistics (BLS). This figure was higher than expected, but still down from 2.5% in August, and the lowest level since February 2021. Meanwhile, the job market has shown renewed resilience, adding 254,000 new jobs in September, far more than expected. So the economy seems fine despite the high rates.

That’s where chatter of a “no landing” scenario enters the chat. This scenario describes strong economic growth irrespective of Fed policy, which could potentially take future rate cuts off the table for worries that lower rates could reignite inflation.

The Impact of a No Landing Scenario 

In line with this thinking, Atlanta Fed President Raphael Bostic recently suggested the Fed could keep interest rates unchanged in November to see how the data unfold. Meanwhile, skeptics are wondering if interest rates will have to remain elevated for the long haul.

Only time will tell how both the economy and Fed policy will unfold.

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