The Fed’s Economic ‘Soft Landing’ Just Got Bumpier

Several pieces of economic data Thursday complicated the Federal Reserve’s plans to gradually lower interest rates in the coming months and bring the economy in for a “soft landing.”

Reports on consumer prices and jobless claims delivered some mixed news on how the Fed is doing to stave off inflation and unemployment. The Consumer Price Index fell to its lowest year-over-year rate since 2021 but ran higher than forecasters expected in September. Not only that, but the 12-month rate of “core” inflation, which leaves out volatile prices for food and energy, rose for the first time since March 2023 to 3.3%, still above the Fed’s goal for a 2% annual rate.

Meanwhile, the Department of Labor said 258,000 people filed for unemployment for the first time last week, up from 225,000 the week prior. This was well over the 230,000 jobless claims forecasters had expected, according to a survey of economists by Dow Jones Newswire and The Wall Street Journal.

Stubborn inflation and rising joblessness are the exact opposite of what the Fed wants as it attempts to bring the economy down from the feverish outburst of inflation that followed the pandemic in 2021.

Will Today’s Inflation Report Change the Fed’s Thinking?

In September, the Fed began trimming its benchmark interest rate, which influences borrowing costs on everything from credit cards to mortgages. At that time, officials said they expected to make further cuts in the coming months. Central bankers projected they’d make a 25 basis-point (bps) cut at each of the two remaining meetings.

But will Fed officials rethink their rate-cut plans with inflation running hotter than expected? Several economists think not.

“The larger-than-anticipated gain in the September consumer price index doesn’t signal a reacceleration in inflation, nor will it deter the Federal Reserve from cutting interest rates by 25 bps at its November meeting,” Ryan Sweet, Chief US Economist at Oxford Economics, wrote in a commentary. “The Fed needs to continue to normalize interest rates to keep the economy on the path toward a soft landing.”

Financial markets agreed. Traders were pricing in an 86.3% chance of a rate cut in September, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

Soft Landing Is Still In the Cards

Before the September meeting, the Fed had held rates high, pushing up borrowing costs to subdue inflation. However, with inflation subsiding closer to the Fed’s goal of a 2% annual rate, the Fed is lowering borrowing costs to bolster the economy and prevent a sharp increase in unemployment.

Historically, when the Fed has hiked interest rates to subdue inflation, the economy has crashed afterward and gone into recession with widespread job losses. Fed officials have voiced hopes that this time will be different.

Both reports released Thursday contained details that suggested the economy could still be on the path to a soft landing. For one thing, the jump in unemployment claims likely had more to do with temporary disruptions from Hurricane Helene and strikes like those at Boeing and less to do with broader trends in the job market, economists said.

The inflation report had a silver lining, too. Shelter costs only rose 4.9% over the year, the slowest increase since March 2022, reversing a sharp uptick in August. Housing has been a major factor preventing inflation from falling all the way back down to the Fed’s 2% milestone.

“The report shows some stickiness on inflation, but we are not yet worried about reacceleration risks,” Stephen Juneau, chief U.S. economist at Bank of America Securities, wrote in a commentary.