Is the soft landing for the US economy, that even the US Federal Reserve had doubts could be achieved, coming into view? US Treasury Secretary Janet Yellen seems to think so: She said last week she sees a path for the US economy to avoid recession, helped by a significant decline in inflation and a strong labour market.
Ms Yellen proclaimed that you don’t have a recession when the US is adding 500,000 jobs in a month amid “the lowest unemployment rate in more than 50 years”. Her comments came after US non-farm payrolls unexpectedly expanded in January, well above the 185,000 consensus forecast, with the unemployment rate dropping to 3.4%, the lowest rate in the US since 1969.
It could well be that the January data are an outlier, but even allowing for any correction in February, the data points to continuing strong labour market conditions.
We also noted that weekly jobless claims remain at very low levels, while the big jump in job vacancies at the end of 2022 points to a continuing very strong US jobs market. Meanwhile, the services index rebounded strongly in January, suggesting the biggest sector of the US economy is regaining momentum.
The US central bank may be continuing to hike rates thereby dampening activity, but other factors that support growth are coming into play. Longer-term interest rates have moved lower in recent months, with the 10-year yield declining to a range of 3.5% to 3.75% from a peak of 4.25% in the autumn. Mortgage rates have fallen by 1% since the autumn, with mortgage applications rising in January.
Meanwhile, US stock markets are also up, by around 15%, in the past three months.
At the same time, as noted by Ms Yellen, US consumer price inflation has fallen from a peak of 9.1% last summer to 6.5% at the end of last year.
US Federal Reserve chair Jerome Powell does not seem overly concerned about the strong jobs data, noting that both wage growth and inflation have slowed, though he did say the data showed why the Fed thinks the process of getting inflation back down to 2% will take some time.
The Fed has been actively dampening down market expectations for rate cuts. However, if there is a soft landing by the economy and it remains close to full employment, why would the Fed lower rates significantly, even if inflation falls to 2%?
Could we be returning to the 1990s, when interest rates of around 5% were the norm in the US?
