Fed poised for possible final interest rate hike on Wednesday in pursuit of ‘soft landing’ 

According to the Associated Press, when Chair Jerome Powell and other Federal Reserve officials gather this week for their latest decision on interest rates, they will do so on the cusp of achieving an elusive “soft landing” — the feat of curbing inflation without causing a deep recession.

After the Fed began aggressively raising borrowing costs early last year, most economists predicted it would send the economy crashing as consumers cut spending and businesses slashed jobs and expansion plans; yet even though the Fed is poised to raise its key rate on Wednesday for the 11th time since March 2022, to its highest point in 22 years, no one is panicking.

Most economists think this week’s hike in the Fed’s benchmark rate, to about 5.3%, will be the last, though they caution that that rate, which affects many consumer and business loans, will likely stay at a peak until well into 2024.

Economists at Goldman Sachs, who have sketched a more optimistic outlook than most others, have downgraded the likelihood of recession to just 20%, from 35% earlier this year.

Durable consumer spending has been a key driver of economic growth as many Americans still have extra savings stemming from the pandemic. Hiring has remained healthy, with employers adding 209,000 jobs in June and the unemployment rate declining to 3.6%.

At the same time, inflation has steadily declined. In June, prices rose just 3% from a year earlier, down from a peak of 9.1% in June 2022 though still above the Fed’s 2% target. Even more encouragingly, measures of underlying inflation have dropped. “Core” prices, which exclude volatile food and energy costs, rose just 0.2% from May to June, the slowest monthly rise in nearly two years. Compared with a year ago, core inflation was still a relatively high 4.8%, though down sharply from 5.3% in May.

Some economists warn that a recession cannot yet be ruled out. The Fed’s rate hikes, they note, have made the cost of buying a home, financing a car purchase, or expanding a business much more burdensome. Economists also caution that inflation’s drop from above 9% to 3% was the relatively easy part. Getting it down to 2% will be harder and take longer.