Has the US economy achieved a soft landing?
Federal Reserve (Fed) Chairman Jerome Powell announced at the eagerly awaited meeting, where markets awaited a signal of interest rate cuts, that they foresee a single rate cut by the end of this year. Despite May’s monthly inflation rate being zero and annual inflation standing at 3.3%, Powell stated that more data is needed for a rate cut. Although American markets responded with historical highs to positive inflation news, indicating that the Fed will not act hastily, Powell emphasized that the Fed will not lower rates without being sure it is moving toward the 2% inflation target, aiming for a soft landing for the American economy. President Biden urgently needs such a victory declaration before the November elections, but the Fed’s cautious approach delays the perception that the economy is on track.
The post-pandemic zero interest rate policy implemented to stimulate the economy and the federal government’s trillion-dollar spending packages have created a cheap money environment. Near-zero rates have been a significant dynamic keeping the economy afloat, particularly fueling substantial activity in the housing sector. Despite warnings that the federal government’s spending packages to revive the economy from Covid-19 and infrastructure spending would have inflationary effects, the Biden administration continued its loose monetary policy in its first two years. However, supply chain bottlenecks and high energy prices pushed inflation to around 9%, necessitating economic brakes. When the Fed aggressively raised interest rates to cool the economy, recession predictions became widespread.
In its fight against inflation, the Fed has insisted on keeping the interest rate around 5.3-5.5%, aiming to rein in the economy. Despite high interest rates over the past year, strong employment figures have kept unemployment below 4%. With economic growth continuing, wage increases exceeding inflation figures have delayed the Fed’s consideration of rate cuts. Although May’s inflation remained at zero, last week’s higher-than-expected employment figures are a significant factor preventing rate cuts.
Despite positive employment and economic growth, the American public’s view of the economy remains largely negative. The Gallup Economic Confidence Index, which hit a low of -58% in June 2022, stood at -34% in May 2024. It is noteworthy that this negative perception, coinciding with Biden’s second year, approached the -72% level during the 2008 economic crisis. While this negative perception is gradually improving, it still remains at very low levels. The Consumer Confidence Index, measured at 97.5 in April, signaled recovery with a rise to 102 in May after a three-month decline. However, a Pew survey in May indicated that 62% of respondents identified inflation as a significant problem.
These figures suggest that despite positive economic indicators and the potential for inflation to be reduced without a recession, the fact that the American public perceives inflation, which reached around 20% cumulatively during Biden’s tenure, as the most significant problem continues to be bad news for Biden. While around 34% of respondents give Biden positive marks for combating inflation, about 60% of respondents believe the economy was better during the Trump era, indicating that voters hold Biden accountable for inflation. In other words, even if the American economy achieves a soft landing, it seems unlikely that voters will credit Biden before the elections.
If inflation continues to hover near zero in the coming months and the Fed lowers rates once or twice, Biden’s job will be easier. However, the persistence of high prices, despite a trend of declining inflation, will benefit Trump. It is essential to remember that economic perception varies according to party affiliation, but inflation will remain a decisive issue for voters of both parties and independents in the elections. Biden had tried to brand his economic policies favoring the middle and lower classes under ‘Bidenomics,’ but due to the political cost of high inflation, he appears to have abandoned this effort. As we move towards the November elections, Biden will continue to argue that the rise in inflation is a result of the pandemic, supply chain issues, and the Ukraine war, highlighting progress in the economy. Despite the largely successful soft landing, convincing voters will require very low inflation figures and rate cuts in the coming months.
