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The best-case scenario for the economy has become more plausible

“The 360” shows you diverse perspectives on the day’s top stories and debates.

What’s happening

Consumer prices fell for the first time in more than two years last month, providing optimism that sustained inflation that has plagued the U.S. economy may finally be easing.

Costs were still up 6.5% in December compared with a year earlier, but the rate of increase has steadily declined for six straight months after hitting a four-decade high during the summer.

“We still have more work to do, though, but we’re clearly moving in the right direction,” President Biden said in an address last week. “There’s more breathing room in store for American workers and families.”

Reducing inflation has been a top priority for economic policymakers since it became clear that prices would not drop on their own once the shock of the pandemic dissipated. The most potent tool to do that is to raise interest rates, which the Federal Reserve has done repeatedly over the past year. Interest rate hikes have proven successful at taming inflation in the past — because they effectively decrease the amount of money moving around the economy — but they very often lead to recession and higher unemployment. It took a major increase in interest rates to subdue the runaway inflation of the late 1970s, leading to a brutal recession in the 1980s.

But, so far, that hasn’t happened in today’s economy. Rather than rising, unemployment continued to drop throughout 2022. An estimated 4.5 million jobs were added last year to bring the unemployment rate down to 3.5%, matching a record low set shortly before the arrival of the coronavirus pandemic.

Why there’s debate

These two simultaneous positive trends — declining inflation along with resilient employment — has raised hope that the U.S. may buck conventional wisdom and experience a “soft landing” in which the economy’s ills can be tamed without creating a lot of pain for working Americans.

Optimists believe the “Goldilocks” scenario is plausible in part because, unlike previous instances, today’s economic turbulence is the largely result of major external factors — pandemic disruptions and Russia’s invasion of Ukraine among them — that are stabilizing over time. Others say the job situation is so strong right now that even a modest increase in unemployment in the coming months would still leave workers in good shape, particularly if prices keep dropping.

But a majority of economists still see a recession in the near future, though their reasons vary. Many make the case that, as good as the recent data has been, there is still a long way to go for inflation to be truly brought under control, and the path to accomplish that goal will inevitably bring job losses. Others say worrying shifts in sectors like the housing market and manufacturing are signals that a significant financial downturn is on the horizon.

Many on the political left argue that a recession is entirely avoidable, but only if the Federal Reserve stops raising interest rates and allows promising trends to do their work — a prospect that appears unlikely in the near future.

What’s next

The Federal Reserve is expected to raise interest rates again when it meets later this month, though possibly by a smaller amount than previous increases. It may be several months before it becomes clear whether employment can stay strong in the face of even higher interest rates.

Perspectives

A soft landing is likely unless there’s another major economic disruption

“It looks like the Fed has largely accomplished its mission of taming inflation, without bringing on a recession. Plenty of things can mess up this picture, like another surge of Covid or an escalation of the war in Ukraine, but for now, the economy is looking very good.” — Dean Baker, Center for Economic Policy and Research

There’s simply no way to tame inflation without spiking unemployment

​​A true recession entails job losses — sooner or later. … We’ve already seen jobs losses in technology and finance, but more are coming even though the monthly job figures still look good. Our recession forecast hasn’t wavered. We should all be prepared.” — Lakshman Achuthan and Anirvan Banerji, CNN

Policymakers will drive the economy into recession unnecessarily

“It’s time for the Fed to step back and allow the economy to glide in for the soft landing that everyone wants. Unfortunately, the Fed thinks it can’t do that. It can’t show any weakness. It feels trapped because its policy relies on perceptions of strength, not on actual victories on the battlefield of the economy.” — Rex Nutting, MarketWatch

Even if a recession does come, odds are it will be mild

“My own prediction is indeed for a softish landing: Inflation does seem to be coming down, and while we might not completely avoid a recession, if we have one it will probably be mild.” — Paul Krugman, New York Times

We shouldn’t necessarily be rooting for a soft landing

“The problem with a soft landing is that it will drag out this inflation cycle. That means more months (or years) where wages won’t keep up with rising prices, pushing some households further into debt. … The longer the slog out of inflation, the more households will burn through their savings.” — Allison Schrager, Bloomberg

A recession is the most likely outcome, but it’s not inevitable

“The economy is surely slowing, but there is a possibility that employment growth will not turn negative unless the Fed persists with heavy half-point increases in interest rates over the next few months. Yes, Goldilocks may still have a chance, but it is a slim one.” — Bruce Yandle, Washington Examiner

Today’s economic situation is so unprecedented, any outcome is possible

“If you asked me the question of could there be a soft landing? Yes. Any question that begins with ‘could’ about today's economy, which is just so unpredictable, is going to get the answer yes.” — Jason Furman, economist, to Wall Street Journal

Elites have too much incentive to manufacture a rise in unemployment

“Low unemployment means an unruly workforce with the leverage and confidence to unionize. Rising wages for employees means less money for employers. The higher inflation that tends to accompany a high-demand economy of mass affluence is effectively a massive transfer of wealth from creditors to debtors. … So the uncomfortable truth is that the top 1 percent generally prefer a slower-growing economy with higher unemployment to its opposite.” — Jon Schwarz, Intercept

Is there a topic you’d like to see covered in “The 360”? Send your suggestions to the360@yahoonews.com.

Photo illustration: Jack Forbes/Yahoo News; photos: Getty Images (2)