The Federal Reserve could achieve a soft landing after all. Here's what that would mean for you

The Federal Reserve is expected to announce it will leave rates unchanged at the end of its two-day meeting this week after recent signs the economy is in fairly good shape and as inflation continues to drift lower.

“While there’s been talk about an imminent recession going back to early last year, the U.S. economy has remained substantially more resilient than expected,” said Mark Hamrick, senior economic analyst at Bankrate.

“A soft landing appears to be the greatest likelihood for next year,” he said. However, the economy isn’t out of the woods just yet, Hamrick added, and “a mild and short recession can’t totally be ruled out.”

Even though inflation is still above the central bank’s 2% target, markets have already been pricing in the likelihood that the Fed is done raising interest rates this cycle and is now looking toward potential rate cuts in 2024.

For consumers, that means relief from high borrowing costs — particularly for mortgages, credit cards and auto loans — may finally be on the way as long as inflation data continues to cooperate.

And yet, “continued slowing in inflation doesn’t mean price decreases, it means a price leveling,” said Columbia Business School economics professor Brett House.

Hope for a ‘softish’ landing

If the central bank can continue to make progress toward its 2% target without bringing the economy to a more abrupt slowdown, there is the possibility of achieving the sought-after “Goldilocks” scenario.

In that case, the economy would grow enough to avoid a recession and a negative hit to the labor market, but not so strongly that it fuels inflation.

For consumers, that means “we are likely to see interest rates come down slowly and growth to remain relatively robust and we are likely to see the jobs market remain relatively strong,” House said.

For some, that expectation may be too optimistic.

“While we also expect a softish landing, the pace of the recent rally in stocks and bonds looks unlikely to be sustained,” Solita Marcelli, UBS Global Wealth Management’s chief investment officer Americas, wrote in a recent note.

“Equity markets are already pricing in plenty of good news, pointing to an unrealistic level of confidence from stock investors,” Marcelli said.

Markets are now even showing a roughly 13% chance of a rate cut as early as January, according to the UBS note.

Fears of a hard landing

Central bank policymakers, however, won’t cut for the sake of cutting. More likely, that kind of policy easing would be in response to a sharply slowing economy and rising unemployment, neither of which would be good news for most Americans.

“Aggressive rate cutting cycle would be a sign of deep worry that we are heading toward a hard landing,” House said. That has negative implications for the labor market and, therefore, consumers. “The most important determinant of household finances is whether people have a job or not,” House said.

And economists still haven’t ruled out a recession in the second half of 2024.

The job market already shows signs of slowing. While the unemployment rate declined to 3.7%, the Labor Department reported that job openings also fell to 8.73 million in October, the lowest level since March 2021.