The Fed's Soft Landing Act – Cue the Applause, Please

Well, folks, it looks like the Federal Reserve has finally pulled off the economic equivalent of a gymnast sticking the landing after a quadruple backflip. That’s right, we’re talking about a "soft landing" – not just a myth whispered about by optimistic economists at cocktail parties, but a reality, at least for now. Inflation is down, unemployment is low, and we’re cruising on solid economic growth. It’s the economic trifecta!

But let’s not get ahead of ourselves. The Fed’s recent half-point rate cut is like a small victory dance. Before this, the Fed’s interest-rate target was hovering around 5.25% to 5.5%, which felt a bit like showing up to a casual brunch in a tuxedo – completely out of place. Now, they’ve cut it down a notch, which means we might finally look a bit more "normal," whatever that means these days.

Welcome to Normal: Now Featuring Imperfections

Let's talk about this word "normal." It's like your first car. Not a luxury sedan, but it gets you from point A to B with only a few squeaks and rattles. "Normal" doesn’t mean we’re living in economic paradise. There will still be bumps along the way—some people might lose their jobs, and not every paycheck will outpace inflation. Prices are still on the rise, but now they’ll be more like your grandmother’s Buick pulling out of the driveway rather than a Ferrari speeding down the Autobahn.

The Fed’s High Wire Act

Just over a year ago, the Fed was like that overly cautious friend who’d rather break up with the economy than see it make a mistake. Core inflation was around 4%, double the Fed’s 2% target. They thought, "Let’s raise interest rates to a 20-year high and scare the pants off the economy. That’ll teach it a lesson!" Well, surprise, surprise, the economy didn't dive into a recession. Supply chains untangled themselves, workers returned, and businesses got back on track. Imagine the Fed’s shock when their scare tactics didn't result in a massive economic hangover.

Did Someone Say "Raising Prices at Will"?

In this new world of "normal," companies can't just jack up prices whenever they feel like it, and workers can't get a raise simply by swapping jobs. A year ago, that was the name of the game. But now, with core inflation falling to an estimated 2.7%, the game has changed. Even better, if you factor in the lagging rent numbers, we might actually be closer to the Fed’s dream scenario.

The Fed’s Crystal Ball

According to the Fed's projections, core inflation could fall to 2.2% next year. It's not the magical 2% they dream of, but it's close enough to avoid heartburn. Unemployment is expected to rise a bit, but not because people are getting laid off. Nope, it’s just that firms are being more choosy about who they bring on board, like a dating app for employers – they’re swiping left a bit more often.

Behind the Scenes: Powell’s Poker Face

Fed Chair Jerome Powell had to admit something on Wednesday: "Our intention with our policy move today is to keep it there." Translation? The Fed is aiming to keep the job market "in solid condition." It's like watching someone slowly remove a band-aid—painful but necessary. Powell also dropped the hint that they’re not behind the curve, but they’re keeping an eye on it, just in case.

The New Normal for Interest Rates

Don’t expect to see those pre-pandemic zero-ish interest rates again. The world has changed, and so have the rules. We’re in for a world with a bit more inflationary pressure, shrinking labor forces, and that fun little project called "net zero carbon emissions." All this means the neutral interest rate is expected to be around 3.25% to 3.5% in the long term. Cue the sighs from homebuyers and stock market investors who long for the days of cheap money.

The Curtain Call

So, what's the takeaway from this economic drama? The Fed has managed to steer the economy toward a soft landing, at least for now. Long-term rates might rise as confidence in this soft landing grows, but for now, we're in a weird but wonderful state of normalcy. Investors, homeowners, and the rest of us will have to adjust to this new reality—where bond yields are a bit higher and mortgage rates aren't quite the bargain they used to be.

But hey, at least we’re not in a recession, right? Let's raise a glass to the Fed's high-wire act, and hope they don’t slip anytime soon. Cheers to normal! ??